Recopilacion_Pruebas2

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Recopilación de “Pruebas 1” años anteriores
Course: Leadership and Business Strategy, EAA 305
First Quarter 2013 - Mid Term Exam 
Please write your name in all pages. 
This is an “open book” exam. 
You have 80 minutes to complete your answers.
You may answer in English or in Spanish. 
Question Nº 1
	The October 8, 2012 issue of Fortune magazine included a section on “The Greatest Business Decisions of all Time”, in which Henry Ford’s decision to double his workers’ wages, was ranked as the best management decision ever. The story, as reported by Fortune, is as follows:
	Henry Ford had a problem. He was becoming too successful. The growing popularity of the Model T was causing him to rethink his ideas about mass production. In 1913, he had introduced the moving assembly line at his plant in Highland Park (Michigan) and it had worked far better than he could have imagined. The year before the assembly line was installed; he had doubled production of the Model T by doubling the size of his workforce. The following year he nearly doubled production again, but this time he did it with the same number of workers. The assembly line had made the plant so efficient that Highland Park payroll actually fell.
	The trouble was that employee turnover was accelerating at an alarming rate. The dispiriting, mind-numbing work on the line was causing workers to quit en masse. The men (and it was all men back then) reacted to their narrowly defined, repetitive, and physically demanding jobs by leaving them.
	Acting on the advice of his devoted lieutenant, James Couzens, Ford decided to take radical action. On Jan. 5, 1914, Ford and Couzens summoned newspaper reporters to the plant to publicize changes in employment policies at Highland Park that they hoped would improve employee retention. First, the company would reduce the work day from nine hours to eight. Second, it was moving to three shifts a day instead of two, opening up lots of new jobs. But the big news came in the third announcement: subject to certain conditions, Ford would more than double the basic rate of pay to $5 dollars a day. The 11 year old company was willing to spend an additional $10 million dollars annually to improve productivity and the lives of its workers.
	The news spread quickly beyond southeast Michigan. “A magnificent act of generosity” declared the New York Evening Post. But the Five Dollar Day turned out to be an excellent investment. Within a year, annual labor turnover fell from 370% to 16%; productivity was up 40% to 70%. Between 1910 and 1919, Henry Ford reduced the Model T’s price from around $800 to $350, solidified his position as the world’s greatest automaker, and made himself a billionaire. And by raising wages he expanded the overall market for the Model T.
 “We believe in making 20,000 men prosperous and contented rather than follow the plan of making a few slave drivers in our establishment, millionaires”, Ford said to reporters that January.
End of the story.
a) In the first class, the main objective of firms in capitalistic societies was discussed. You found this discussion, also, in a couple of papers included in the reading list for the course. Three views emerge from that discussion: the ‘primacy of shareholders’ vs. the ‘primacy of stakeholders’ vs. ‘shared value’. There is no consensus among academics or practitioners about which view is correct. What do you think? What should be the purpose of business? Why? Please limit your answer to one page. (10 points)
b) What does this story, about Henry Ford’s decision to double his workers wages, tell about the issue of the purpose (or objective function) of firms? Does it confirm any of the three before mentioned theories? Please limit your answer to one page. (10 points)
c) The writer reports that after the salary increase: “productivity was up 40% to 70%”. What is the meaning of the word ‘productivity’? What is the formula for measuring productivity that is being used in this case? (10 points)
Question Nº 2 
Professor Koljatic reviewed five different methodologies to do the “external analysis” in the initial stage of any strategic planning process - the “where are we?” stage – when firms think about their future goals and plans.
a) Please name these five methodologies (5 points)
b) One of the methodologies for external analysis is the application of micro economic theory – in particular industrial organization theories - to evaluate the competitive environment. According to Koljatic, micro economics sheds light on two different issues. One is the intensity of competition – basically how imperfect is the competition in the industry. What is the second application? (5 points)
c) It is common knowledge that a higher market share in an industry translates into a higher profitability. Please explain why. (10 points)
d) An analyst expressed his disagreement with this “common knowledge”, based on the observation of the global automobile industry. In fact, the most profitable brands are the German carmakers (Mercedes Benz and BMW), which have a negligible market share (less than 1%). How can you explain this paradox that small companies have the better results in terms of value creation and capture than companies that manufacture a lot more cars? (10 points).
 
Question 3.- 
There is a very good text book about strategic management by two American professors, Barney and Hesterley, which you can find in the library. In this book, page 53, you will find the following text:
“The five forces model has three important implications for managers seeking to choose and implement strategies. First, this model describes the most common sources of external threats in industries. These are the threat of entry, the threat of rivalry, the threat of substitutes, the threat of suppliers, and the threat of buyers. Second, this model can be used to characterize the overall level of threat in an industry. Finally, since the overall level of threat in an industry is, according to Structure-Conduct-Performance logic, related to the average level of performance of a firm in an industry, the five forces model can also be used to anticipate the average level of performance of firms in an industry.
 Of course, it will rarely be the case that all five forces in an industry will be equally threatening at the same time. This can sometimes complicate the anticipation of the average level of firm performance in an industry. Consider, for example, the four industries in Table 2.6. It is easy to anticipate the average level of performance of firms in the first two industries: In Industry I, this performance will be high; in Industry II, this performance will be low; however, in Industries III and IV it is somewhat more complicated. In these mixed situations, the real question to ask in anticipating the average performance of firms in an industry is: “Are one or more threats in this industry powerful enough to appropriate most of the profits that firms in this industry might generate?” If the answer to this question is yes, then the anticipated average level of performance will be low. If the answer is no, then this anticipated performance will be high.
Even more fundamentally, the five forces framework can be used only to anticipate the average level of firm performance in an industry. This is all right if a firm´s industry is the primary determinant of its overall performance. However, as described in the Research Made Relevant section, research suggests that the industry a firm operates in is far from the only determinant of its performance.”
Table. 2.6 Estimating the Level of Average Performance in an Industry
	
	Industry I
	Industry II
	Industry III
	Industry IV
	Threat of Entry
	High
	Low
	High
	Low
	Threat of Rivalry
	High
	Low
	Low
	High
	Threat of Substitutes
	High
	Low
	High
	Low
	Threat of Suppliers
	High
	Low
	Low
	High
	Threat of Buyers
	High
	Low
	High
	Low
	Expected Average Firm
	High
	Low
	?
	?
	 Performance
	
	
	
	
Professor Koljatic thinks that the bookis wrong in this part. In fact, he wrote a mail to Jay Barney, who acknowledged the mistake. What is the mistake that Jay Barney made? (10 points)
PAUTA
Course: Leadership and Business Strategy , EAA 305a
First semester 2013 First Mid Term Exam 
Please write your name in all pages. 
This is an “open book” exam. 
You have 80 minutes to complete your answers.
You may answer in English or in Spanish. 
Question Nº 1
	The October 8, 2012 issue of Fortune magazine included a section on “The Greatest Business Decisions of all Time”, in which Henry Ford’s decision to double his workers’ wages, was ranked as the best management decision ever. The story, as reported by Fortune, is as follows:
	Henry Ford had a problem. He was becoming too successful. The growing popularity of the Model T was causing him to rethink his ideas about mass production. In 1913, he had introduced the moving assembly line at his plant in Highland Park (Michigan) and it had worked far better than he could have imagined. The year before the assembly line was installed; he had doubled production of the Model T by doubling the size of his workforce. The following year he nearly doubled production again, but this time he did it with the same number of workers. The assembly line had made the plant so efficient that Highland Park payroll actually fell.
	The trouble was that employee turnover was accelerating at an alarming rate. The dispiriting, mind-numbing work on the line was causing workers to quit en masse. The men (and it was all men back then) reacted to their narrowly defined, repetitive, and physically demanding jobs by leaving them.
	Acting on the advice of his devoted lieutenant, James Couzens, Ford decided to take radical action. On Jan. 5, 1914, Ford and Couzens summoned newspaper reporters to the plant to publicize changes in employment policies at Highland Park that they hoped would improve employee retention. First, the company would reduce the work day from nine hours to eight. Second, it was moving to three shifts a day instead of two, opening up lots of new jobs. But the big news came in the third announcement: subject to certain conditions, Ford would more than double the basic rate of pay to $5 dollars a day. The 11 year old company was willing to spend an additional $10 million dollars annually to improve productivity and the lives of its workers.
	The news spread quickly beyond southeast Michigan. “A magnificent act of generosity” declared the New York Evening Post. But the Five Dollar Day turned out to be an excellent investment. Within a year, annual labor turnover fell from 370% to 16%; productivity was up 40% to 70%. Between 1910 and 1919, Henry Ford reduced the Model T’s price from around $800 to $350, solidified his position as the world’s greatest automaker, and made himself a billionaire. And by raising wages he expanded the overall market for the Model T.
 “We believe in making 20,000 men prosperous and contented rather than follow the plan of making a few slave drivers in our establishment, millionaires”, Ford said to reporters that January.
End of the story.
d) In the first class, the main objective of firms in capitalistic societies was discussed. You found this discussion, also, in a couple of papers included in the reading list for the course. Three views emerge from that discussion: the ‘primacy of shareholders’ vs. the ‘primacy of stakeholders’ vs. ‘shared value’. There is no consensus among academics or practitioners about which view is correct. What do you think? What should be the purpose of business? Why? Please limit your answer to one page. (10 points)
Primacy of shareholders – managers work to maximize the wealth of the owners.
Primacy of stakeholders – managers work to maximize the ‘well being’ of all stakeholders.
Shared Value – Do Good and do Well! Work for the well being of the community in which the firm is inserted and wealth maximization will come as a result.
Primacy of shareholders is the classical economics assumption economists do about the objective function of the firm.
The stakeholder theory was developed at the end of the XX century as al alternative paradigm to wealth maximization for the owners, as a rejection to the abuses that were happening in all parts of the world with workers, consumers, etc. The problem with this paradigm is that it is logically impossible to maximize more than one variable. There is nothing wrong with replacing wealth maximization with another variable to maximize. In fact we saw in class several examples of maximization of other variables (i.e., Patagonia the environment, Southwest the employees, etc.) You may pick whatever stakeholder you want to satisfy most, but what you can’t do is do the maximization for all of them simultaneously.
Porter’s shared value is a primacy of shareholders in disguise, since at the end of the day, profits are the end result which firms, in this paradigm are trying to maximize. Obviously no firm will damage the environment or the society in which it operates on purpose. You would have to be an idiot not to understand that in the long run, it would hurt economic value creation and capture for shareholders . 
e) What does this story, about Henry Ford’s decision to double his workers wages tell, about the issue of the purpose (or objective function) of firms? Does it confirm any of the three before mentioned theories? Please limit your answer to one page. (10 points) 
This is a good example of Koljatic’s argument that wealth creation and capture by the shareholders can only be done if managers understand that they have to create value for all stakeholders. The difference with the stakeholder paradigm is that the ultimate test in any decision under the shareholder paradigm is value creation for shareholders. Henry Ford wanted to reduce turnover and increase productivity to increase his wealth – as the article says, raising wages was not an act of generosity- but pure profit seeking.
f) The writer reports that after the salary increase: “productivity was up 40% to 70%”. What is the meaning of the word ‘productivity’? What is the formula for measuring productivity that is being used in this case? (10 points)
Productivity = Output/Input
In Ford’s case:
Volume (cars) manufactured/ Headcount
Question Nº 2 
a) Professor Koljatic reviewed five different methodologies to do the “external analysis” in the initial stage of any strategic planning process - the “where are we?” stage – when firms think about their future goals and plans. Please name these five methodologies (10 points)
The five are:
Microeconomics
PEST (political, Economic, Social, Tecnological)
Life Cycle of the industry
Five Forces (Porter)
Value Chain (5 forces + Complementors)
b) One of the methodologies for external analysis is the application of micro economic theory – in particular industrial organization theories - to evaluate the competitive environment. According to Koljatic, micro economics sheds light on two different issues. One is the intensity of competition – basically how imperfect is the competition in the industry. What is the second application? (10 points)
To understand the possible legal (anti trust) situations. Koljatic gave several examples of mergers and /or acquisitions in which the anti trust authorities (Tribunal de la Libre Competencia) had a say in authorizing or rejecting deals.
c) How are the “kinked demand curve” and “experience curves” – also known as “learning curves” - related? Please explain and limit your answer to one page. (10 points)
 No relation. 
Question 3.- 
In Barney and Hesterley book, page 53, you will find the following text:
“The five forces model has three important implications for managers seeking to choose and implement strategies. First, this model describes the most common sources of external threats in industries. These are the threat of entry, the threat of rivalry, the threat of substitutes, the threat of suppliers,and the threat of buyers. Second, this model can be used to characterize the overall level of threat in an industry. Finally, since the overall level of threat in an industry is, according to Structure-Conduct-Performance logic, related to the average level of performance of a firm in an industry, the five forces model can also be used to anticipate the average level of performance of firms in an industry.
 Of course, it will rarely be the case that all five forces in an industry will be equally threatening at the same time. This can sometimes complicate the anticipation of the average level of firm performance in an industry. Consider, for example, the four industries in Table 2.6. It is easy to anticipate the average level of performance of firms in the first two industries: In Industry I, this performance will be high; in Industry II, this performance will be low; however, in Industries III and IV it is somewhat more complicated. In these mixed situations, the real question to ask in anticipating the average performance of firms in an industry is: “Are one or more threats in this industry powerful enough to appropriate most of the profits that firms in this industry might generate?” If the answer to this question is yes, then the anticipated average level of performance will be low. If the answer is no, then this anticipated performance will be high.
Even more fundamentally, the five forces framework can be used only to anticipate the average level of firm performance in an industry. This is all right if a firm´s industry is the primary determinant of its overall performance. However, as described in the Research Made Relevant section, research suggests that the industry a firm operates in is far from the only determinant of its performance.”
Table. 2.6 Estimating the Level of Average Performance in an Industry
	
	Industry I
	Industry II
	Industry III
	Industry IV
	Threat of Entry
	High
	Low
	High
	Low
	Threat of Rivalry
	High
	Low
	Low
	High
	Threat of Substitutes
	High
	Low
	High
	Low
	Threat of Suppliers
	High
	Low
	Low
	High
	Threat of Buyers
	High
	Low
	High
	Low
	Expected Average Firm
	High
	Low
	?
	?
	 Performance
	
	
	
	
Professor Koljatic thinks that the book is wrong in this part. In fact, he wrote a mail to Jay Barney, who acknowledged the mistake. What is the mistake that Jay Barney made? (10 points)
Table 2.6 is wrong. In Industry I, if all threats are high….. expected average firm profitability should be Low.
In Industry II, if all threats are LOW, expected average profitability should be High.
Course: Leadership and Business Strategy, eaa 305 a 
First Semester 2014 - First Term Exam 
Please write your name in all pages. 
This is an “open book” exam. 
You have 80 minutes to complete your answers.
Grades are relative to the highest points achieved by the best answer to each question
You may answer in English or in Spanish. 
Question Nº 1.- ( 40 points) 
A recent article in Yahoo Finance about Wal-Mart, reads as follows: 
Could Wal-Mart Be the Next Giant Failure in Retail?
By Travis Hoium | February 2, 2014 | 
Walter-Mart recently reported that it will be laying off 2,300 workers, reportedly to cut the fat of middle management. Layoffs aren't uncommon at any large company -- competitor Target also recently said it would lay off nearly 500 employees and keep hundreds more positions vacant -- but such personnel reductions also aren't something a growing company does very often. What's worth keeping an eye on is whether the Wal-Mart layoffs are a symptom of much larger problems at Wal-Mart. The company has been a giant of retail for decades, but there are signs that its reign is coming to an end. 
The king of retail doesn't stay king long. 
Wal-Mart is certainly the king of retail today, commanding $475 billion in sales in 2013 alone. But the list of retailers that have gone from dominance to mothballs (naphthalene) is long and distinguished.
F.W. Woolworth was once one of the largest retailers in the world, creating the modern retail model that Wal-Mart eventually perfected. Started in 1878, the company expanded its sales enormously - the Woolworth Building was the tallest building in the world when it was completed in 1913, a monument to the retailer's size - until sales began to decline in the 1980s, around the same time Wal-Mart began to expand. By 1997, Woolworth was almost completely gone, changing its name to Foot Locker to focus on its remaining sneaker business. 
Not long ago, Sears and Kmart were both big names in retail, but they're now in deep trouble. Kmart went through bankruptcy once in the early 2000s and bought Sears, forming the Sears Holdings. Now the new Sears is struggling just to stay afloat and may end up in bankruptcy before long.
The list of high-profile retail failures goes on and on. From Montgomery Ward to Circuit City to K-B Toys to Mervyn's, it's a tough business to be in and success today doesn't guarantee success tomorrow. 
Wal-Mart's problems are starting to show. 
If Wal-Mart is the next giant retailer to go under, it won't happen overnight. Failure in retail starts with a trickle. Consumer trends make your stores less popular, a rival grows from out of nowhere, and eventually same-store sales (also referred as SSS) begin to fall and you're on the road to failure. That last factor is why investors should be concerned about Wal-Mart, because same-store sales were down in each of the last three quarters. 
Wal-Mart U.S. Stores SSS % change against same quarter previous year: 	
 Q4 2012 Q1 2013 Q2 2013 Q3 2013
 1% (1.4%) (0.3%) (0.3%)
Source: Wal-Mart quarterly earnings releases.
The fourth quarter will make a full year of declining same-store sales for Wal-Mart. Retailers were forced to discount heavily this holiday season and more consumers switched to buying products online. Wal-mart is scheduled to report Q4 results on Feb. 19. Those online retailers are now the No. 1 challenge for Wal-Mart. According to its recent earnings release, Amazon.com had $74.45 billion in sales in 2013. What makes Amazon a bigger threat today is the company's sheer size. It's now bigger than Target, and every percentage point of growth takes growth away from Wal-Mart. In fact, Wal-Mart's budget-conscious consumers are probably more likely to shop on Amazon than Target's consumers.
Retail failures happen quickly.
It doesn't take long for a retailer to go from the top of the world to bankrupt. Kmart lost just $22 million in the second quarter of 2001, but was bankrupt by Jan. 22, 2002. In the four months leading up to bankruptcy, same-store sales fell 1.8%, 4.4%, 2.6%, and 1%, respectively, from a year earlier. You don't need a big decline in sales to suck up all of your profits in retail. 
Circuit City reported a 4.2% rise in same-store sales as late as December 2006, but by December 2007, same-store sales were down 11% for the month and the company would be out of business by November 2008. Circuit City went from optimism to bust in less than two years. 
The reason that retailers are sensitive to declines in sales is that there is a lot of overhead that goes into selling in brick-and-mortar[footnoteRef:1] stores. Wal-Mart spent $89.2 billion on overhead over the past year, and based on current margins and overhead spending, it would only take a 13.6% decline in sales to eat up all of Wal-Mart's profits. [1: Brick and Mortar (“ladrillo y cemento” in Spanish) refers to the difference between on line stores and physical stores. Stores such as Wal- Mart-the Líder chain in Chile is a Wal –Mart subsidiary – have buildings; on line stores or dot.com (like amazon.com) do not have any stores.] 
Will Wal-Mart go under?
It's far too early to say that Wal-Mart will eventually be a laughingstock in retail like Kmart, but the warning signs are there. Same store sales are down, consumers are trending away from brick-and-mortar stores as a whole, and Wal-Mart is cuttingstaff to save costs. If those trends continue, it won't be good for the future of Wal-Mart. 
It may be unthinkable to even consider that Wal-Mart could go bankrupt one day, but this wouldn't be the first big-name retailer to go under. As I've pointed out above, once a retailer stops growing, the fall can be fast and furious. At the very least, I'd be wary of Wal-Mart as an investment right now, because it's neither a growth stock nor a great value in a floundering retail environment.
End of the article.
 
a) In strategic management there are three stages -- what Matko called the three questions of the taxi driver – which management has to go through. Please name these stages. Don’t explain. (5 points)
b) The issues raised by the journalist about Woolworth, Sears, Kmart and Circuit City history - - and Wal –Mart’s possible future -- relate directly to two of the subjects we discussed in class when talking about how to do the external analysis. Please name these subjects. You are asked to be specific. (16 points)
As Rumelt says in page 9 of his paper The Perils of Bad Strategy? – You have to do “a diagnosis: an explanation of the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as being the critical ones”. 
In the diagnosis (Matko’s first taxi question: where are we now?) you do an internal and an external analysis.
 In the external analysis, one of the tools at hand is the Lyfe Cycle analysis (the others being PEST; Microeconomics; Five Forces + Complementors) should allow you to perceive the risks associated with a decline en Same Store Sales. PEST will allow you to realize there is a change in cultural trends. Those are the two subjects. 
SUBJECT 1 (8 points)
The Life Cycle
SUBJECT 2 PEST: Cultural Trends (8 points)
The journalist wrote:
“Same-store sales are down, consumers are trending away from brick-and-mortar stores as a whole, and Wal-Mart is cutting staff to save costs. If those trends continue, it won't be good for the future of Wal-Mart”. There is an obvious change in Cultural Trends – in fact, the journalist uses the words ‘trending away´.
 
c) The analysis done by the journalist is very interesting and could be very useful; now, in which of the three stages you identified in (a) would you use the analysis? Why? How? (10 points)
WHY? In the first Stage, Diagnosis, answering the question: Where are we now? As Rumelt says in page 9 of his paper The Perils of Bad Strategy? – In this stage you have to do “ a diagnosis: an explanation of the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as being the critical ones”. 5 points
HOW? By doing an external analysis.
 In the external analysis, one of the tools at hand is the Lyfe Cycle analysis (the others being PEST; Microeconomics; Five Forces + Complementors) should allow you to perceive the risks associated with a decline en Same Store Sales. 
d) The journalist explains the reason that retailers are sensitive to declines in sales by saying:” there is a lot of overhead that goes into selling in brick-and-mortar[footnoteRef:2] stores”. Could you explain what the journalist is saying in the terms we have used in class to explain these type of situations? In other words, please explain in Matko’s words what is going on. (4 points) [2: Brick and Mortar (“ladrillo y cemento” in Spanish) refers to the difference between on line stores and physical stores. Stores such as Wal- Mart-the Líder chain in Chile is a Wal –Mart subsidiary – have buildings; on line stores or dot.com (like amazon.com) do not have any stores.] 
What the Journalist is saying is that Wal Mart is at risk of loosing its Economies of Scale. In this case the last point in the slide we saw in class about Economies of Scale may be happening:
· diseconomies of scale occur when firms become too large and bureaucratic
The key question is whether Wal Mart is becoming too large. 
 
d) In class we reviewed the idea that there is a difference between two key concepts in strategy: Minimum Efficient Scale and Operational Leverage. If the same stores sales fall, as is happening in Wal Mart, will it affect negatively the Minimum Efficient Scale or the Operational Leverage? (5 points)
The operational Leverage: sales are going down! This is not a question about the “ideal” scale size for Wal Mart stores but a problem of low sales given the existing scale. 
e) How is it possible that Amazon could have a Competitive Advantage against Wal – Mart? Hint: think about the drivers of competitive advantage we saw in class when we talked about cost advantages. (10 points)
Amazon is taking advantage of the Internet – a new technology which gives Amazon a cost advantage independent of scale. Please refer to the next slides. 
Question Nº 2 
Question Nº 2 (10 points)
Last week, Quiñenco, one of the largest conglomerates in Chile and holding group for the Luksic family, announced that it would establish three new positions in its organizational structure at the highest level, reporting directly to the CEO (Chief Executive Officer) of the company: A Manager for Environmental Affairs and Sustainability (to be filled by a lawyer who specializes in environmental law and who worked previously as head of the national environmental agency CONAMA), a Manager for Corporate Communications ( a well-known journalist) and a Chief Economist ( an Ingeniero Comercial de la Catolica with a PhD in economics from the University of California). The company explained in a press release that these positions were necessary to strengthen its management.
Please explain the reasons that this company may have to hire these professionals. Hint: the professor thinks there are at least two reasons why these positions are necessary. (10 points)
It is obvious that the business environment in Chile is changing with the change of government because of new and higher taxes, more power by the organized communities, etc. etc. Given these changes , the company is strengthening its capabilities to do two things:
2a) Diagnosis: these new managers should be able to strengthen the diagnosis stage in strategy formulation.
2b) Strategy implementation. Reinforcing the HOW are we gopin to get there. 
The next slide identifies the two spheres of action of the new managers.
Question Nº 3 (20 points)
Please explain why the Gordon Model gives guidance to management about what are the tasks of a CEO (general manager). For those who do not remember the model, it is described in Wikipedia, as follows: 
The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. In other words, it is used to value stocks based on the net present value of the future dividends. The equation most widely used is called the Gordon growth model. It is named after Myron J. Gordon of the University of Toronto, who originally published it along with Eli Shapiro in 1956 and made reference to it in 1959; although the theoretical underpin was provided by John Burr Williams in his 1938 text "The Theory of Investment Value".
The variables are: is the current stock price. is the constant growth rate in perpetuity expected for the dividends. is the constant cost of equity capital for that company. Is the value of the next year's dividends. There is no reason to use a calculation of next year's dividend using the current dividend and the growth rate, when management commonly disclose the future year's dividend and websites post it.
The two tasks of a manager are to make the Company profitable today (the numerator in the equation) (10 points)and to make the Company Grow ( the G in the denominator)(10 points) .
 Please refer to the next slide. 
Course: Leadership andBusiness Strategy , EAA 305a
First semester 2012 Mid Term Exam
Please write your name in all pages. 
You may answer in English or in Spanish. 
This is an “open book” exam.
Question Nº 1
A recent report in The Economist, the British newspaper, informed the following: 
 Asset-light or asset-right? Strategy discussions at Accor illustrate the hotel industry’s debate about its business model
	Accor is a French hotel group which operates in over 91 countries. Accor has France’s largest number of hotels in the low-, medium- and high-range price brackets in Paris and across the country. Headquartered in Paris, France, the group owns, operates and franchises 4,426 hotels ranging from economy to luxury on five continents. 
	In the 1960s, the travel industry in France was booming, but many new hotels were concentrated only in major urban areas such as Paris. At the time, Paul Dubrule and Gérard Pélisson were both living in the United States, working for major computer firms. They went into business together, and in 1967, founded the Accor hotel group. 
	Having seen the success of American lodging properties in suburban areas and along major highways, Dubrule and Pélisson opened their first American-style Novotel hotel outside of Lille in northern France. In 1974, they launched the Ibis brand with the opening of the Ibis Bordeaux. The following year, Accor acquired the Courtepaille and Mercure brands, and in 1980 the Sofitel hotel brand, which then consisted of 43 hotels. In 1985, it launched Hotel Formula 1 brand, offering low-quality accommodation at low prices. In the 1990s, it diversified to include Accor Casinos and in 2004, bought a nearly 30 per cent stake in Club Méditerranée. In 2011, Accor introduced its new brand positioning with the slogan: “Open new frontiers in hospitality.”
	In spite of an excellent value creation track record, in late 2011, Mr. Gilles Pélisson, the CEO of Accor, son of one of the founders, was fired by the Board. Mr. Cittern, the board chairman, says the board decided to part with him because of “strategic divergences” over the future of Accor. The other reason was that Mr. Denis Hennequin, the boss of McDonald’s in Europe, was suddenly available, having decided not to stay with McDonald’s, but was getting other attractive job offers and the Accor Board wanted to have him as CEO. 
	The altercations between Mr Pélisson and his board centered on the pace and model of Accor’s expansion. Like other large hotel chains, Accor has a big “pipeline” of new hotel projects under way. It wants to increase its capacity from 500,000 rooms now to 600,000 in 2013 and perhaps 700,000 by 2015. Of these 28% will be franchised to other hotel operators, 30% will be managed but not owned by Accor and the rest, 42%, will be fully owned or leased. 
	Even so, Accor will still own (or lease long-term) more hotels than most of its rivals. It calls its strategy “asset-right” as opposed to “asset-light”— industry jargon for franchising out or managing hotels whose buildings belong to someone else, often an individual or an investment fund. Marriott, a big American hotel group, started to sell its property in the late 1970s and today owns only six of the 3,400 hotels that bear its brands. InterContinental, a British-based firm that is another big believer in being asset-light, owns only 15 hotels, manages 628 and has its brands woven into the towels of a further 3,800 franchised operations. 
	One advantage of owning the whole operation, buildings included, is that the company has absolute control over the hotel and its maintenance. Another is that hotel property can appreciate considerably. In the four years to 2006 the value of London’s Ritz hotel increased fourfold to 980 million Euros. Yet stock market valuations often fail to reflect rising property valuations, and investors do not like hotel groups tying up so much capital in this way, says Simon Mezzanotte of Société Générale, a bank. 
	Some 60-70% of the costs of an hotel whose property is owned by the hotel chain, are pretty much fixed, including mortgage payments, taxes and energy bills, reckons Bjorn Hanson of New York University. He therefore sees the rationale for separating ownership and management, since asset-light firms, having more variable costs, have more scope for efficiency gains. In those that they manage, they get 12.5% of gross revenues, an attractive margin. 
	The attraction of franchising is that it is the quickest way to expand. All the hotel group provides is its brand and its online reservation system in return for a cut of the takings. But it is risky, because the hotel is putting the brands that it has spent decades painstakingly nurturing in the hands of outsiders. For this reason, Marriott rarely franchises outside America, where it has 2,246 such outlets. And Accor says it would never franchise in China, where it manages 100 hotels, because it does not know the market, the people and the culture well enough. “Franchising has the highest risk and potentially the least reward,” worries Stephen Broome of PWC, a consultancy.
	Despite such worries, Accor will apparently rely in the future on franchised outlets to deliver a large share of the new rooms it is planning. Mr. Hennequin announced, recently, after being appointed CEO of the company, that Accor will sell 48 hotel buildings, for 367 million Euros, as part of a plan to liquidate some real estate holdings including 31 properties in France, 10 in Belgium, and 7 in Germany. This sale will cut debt by about 282 million Euros. Who better to lead it, then, than Mr Hennequin from McDonald’s, a company that knows plenty about maintaining a brand image while using franchises to expand around the world.
g) Please consider the paragraph: “Strategy discussions at Accor illustrate the hotel industry’s debate about its business model”. From the text, what is the strategy that Accor will follow in the future? How it is different from the strategy it was following before Mr. Hennequin was hired? Hint: please remember that strategy means making a choice about the business model of the firm. (20 points)
No hemos visto la materia para contestar esta pregunta aún.
h) What are the advantages and disadvantages of an ‘asset right’ versus an ‘asset right’ strategy? Hint: in your answer please consider how each strategy impacts: first, the value creation of a hotel chain and, second, the value capture of a hotel chain. (10 points) 
Esta si deberían poder contestarla.
Question Nº 2 
A recent report in the news announced the following: 
Cut in E-Book Pricing by Amazon Is Set to Shake Rivals
By DAVID STREITFELD, Published: April 11, 2012 
 	Today, Amazon announced plans to push down prices on e-books by more than 30%. The price of some major book titles could fall to $9.99 or less, from $14.99, saving voracious readers a bundle. Amazon is already the dominant force in the e-book industry with the Kindle reader. 
	Electronic books have been around for more than a decade, but took off only when Amazon introduced the first Kindle e-reader in 2007. It immediately built a commanding lead. At one point, before other competitive e book readers were launched by traditional book retailers, like Barnes and Noble, Amazon had 90 percent of the market for e-books. 
	The Amazon Kindle is a series of e-book readers now in its fourth generation. Amazon Kindle e- readers enable users to shop for, download, browse, and read e-books, newspapers, magazines, blogs, and other digital media via wireless networking. 
	Kindle hardware has evolved from the original Kindle introduced in 2007 and a Kindle DX line (with a larger screen) introduced in 2009. Announced in September 2011, the range now includes devices with keyboards (Kindle Keyboard), devices with touch sensitive screens (Kindle Touch), a tablet computer with a reader app and a color display (Kindle Fire) and a low-priced model with an on-screen keyboard (Kindle). Content for the Kindle can be purchased online and downloaded wirelessly inmost countries, using standard Wi-Fi. 
	Apple’s introduction of the iPad, in early 2010, seemed to set the base for a formidable competition in the e books market. But, Amazon has responded making his e-books available in all competing readers, introducing Kindle software for use on various devices and platforms, including Microsoft Windows, iOS, BlackBerry, Mac OS X, Android, webOS, and Windows Phone. Amazon also has a "cloud" reader to allow users to read, and purchase, Kindle books from a web browser. 
	Amazon already controls about 60 percent of the e-book market, and observers comment that the company can take a loss on every book it sells to gain market share for its Kindle devices. When it has enough competitive advantage, it will be able to dictate its own terms; something publishers say is beginning to happen. 
	In the last three months of 2010, Amazon announced that in the United States, their e-book sales had surpassed sales of paperback books for the first time. Traditional bookstores, which have been under pressure from the Internet for years, fear that the price gap between the physical books they sell and e-books from Amazon will now grow so wide they will lose what is left of their market. Barnes & Noble stores, whose Nook is one of the few popular e-readers that is not built by Amazon, could suffer the same fate, analysts say.
 Kindle by Amazon
e) Please consider the following paragraph in the text of the question: ‘Today, Amazon announced plans to push down prices on e-books by more than 30%’. In class we discussed similar pricing tactics mentioning that it was quite common that companies do these significant price cuts. Please explain the logic behind Amazon’s price cut. Why is Amazon cutting prices? Hint: the answer should have two parts: first, identify the phenomenon of deep price cuts in industries; second, why does the phenomenon happen. (20 points)
f) What are the limitations (or perils) of such a strategy? (10 points)
Question 3.- 
The case Adolph Coor’s in the brewing industry ends with the following paragraph:
Coors’s plan for multi-site expansion
As Coor’s began its national roll out, concern about the 25-30 million barrels ceiling on capacity at the Golden site and about the increase in shipping distances prompted it to study a second production site. By 1979, it had identified two possible locations: one in Rockingham County, Virginia, on the Shenandoah River and the other in Anson County, North Carolina, in the Pee Dee River. In 1981, it completed the acquisition of 2,100 acres of land in the Rockingham County. And in August 1985, it announced plans to construct a 10 million brewery plant there.
The construction was to proceed in two phases. In the first phase, for which ground had been broken in November 1985, Coors would add a 2.4 million barrel packaging facility that would bottle and can beer shipped in refrigerated rail cars from Golden. The packaging facility would cost $95 million dollars and to start up in spring 1987. Coors estimated that it would reduce the cost of shipping beer to the East Cost by $2.50 dollars per barrel, helping the company complete its national roll out.
In the second phase, which had not yet been committed to, the facility would be expanded into an integrated 10 million barrel per year brewery. Analysts thought that the second phase might cost $ 500 - $600 million dollars and reduce transportation costs by another $2.50 per barrel. They also noted that to construct the brewery, Coors would probably have to resort to external financing for only the second time in its history. The idea of issuing debt, however, continued to be resisted by Jeff and Peter Coors.
Considering the information in the case, which we discussed in class, please answer the following question: Should Coors build the second phase of the plant, an integrated 10 million barrel per year brewery in Virginia? Will it be able to improve its competitive position significantly? (10 points) 
Pauta
Course: Leadership and Business Strategy , EAA 305a
First semester 2012 Mid Term Exam
Please write your name in all pages. 
You may answer in English or in Spanish. 
This is an “open book” exam.
Question Nº 1
A recent report in The Economist, the British newspaper, informed the following: 
 Asset-light or asset-right? Strategy discussions at Accor illustrate the hotel industry’s debate about its business model
	Accor is a French hotel group which operates in over 91 countries. Accor has France’s largest number of hotels in the low-, medium- and high-range price brackets in Paris and across the country. Headquartered in Paris, France, the group owns, operates and franchises 4,426 hotels ranging from economy to luxury on five continents. 
	In the 1960s, the travel industry in France was booming, but many new hotels were concentrated only in major urban areas such as Paris. At the time, Paul Dubrule and Gérard Pélisson were both living in the United States, working for major computer firms. They went into business together, and in 1967, founded the Accor hotel group. 
	Having seen the success of American lodging properties in suburban areas and along major highways, Dubrule and Pélisson opened their first American-style Novotel hotel outside of Lille in northern France. In 1974, they launched the Ibis brand with the opening of the Ibis Bordeaux. The following year, Accor acquired the Courtepaille and Mercure brands, and in 1980 the Sofitel hotel brand, which then consisted of 43 hotels. In 1985, it launched Hotel Formula 1 brand, offering low-quality accommodation at low prices. In the 1990s, it diversified to include Accor Casinos and in 2004, bought a nearly 30 per cent stake in Club Méditerranée. In 2011, Accor introduced its new brand positioning with the slogan: “Open new frontiers in hospitality.”
	In spite of an excellent value creation track record, in late 2011, Mr. Gilles Pélisson, the CEO of Accor, son of one of the founders, was fired by the Board. Mr. Cittern, the board chairman, says the board decided to part with him because of “strategic divergences” over the future of Accor. The other reason was that Mr. Denis Hennequin, the boss of McDonald’s in Europe, was suddenly available, having decided not to stay with McDonald’s, but was getting other attractive job offers and the Accor Board wanted to have him as CEO. 
	The altercations between Mr Pélisson and his board centered on the pace and model of Accor’s expansion. Like other large hotel chains, Accor has a big “pipeline” of new hotel projects under way. It wants to increase its capacity from 500,000 rooms now to 600,000 in 2013 and perhaps 700,000 by 2015. Of these 28% will be franchised to other hotel operators, 30% will be managed but not owned by Accor and the rest, 42%, will be fully owned or leased. 
	Even so, Accor will still own (or lease long-term) more hotels than most of its rivals. It calls its strategy “asset-right” as opposed to “asset-light”— industry jargon for franchising out or managing hotels whose buildings belong to someone else, often an individual or an investment fund. Marriott, a big American hotel group, started to sell its property in the late 1970s and today owns only six of the 3,400 hotels that bear its brands. InterContinental, a British-based firm that is another big believer in being asset-light, owns only 15 hotels, manages 628 and has its brands woven into the towels of a further 3,800 franchised operations. 
	One advantage of owning the whole operation, buildings included, is that the company has absolute control over the hotel and its maintenance. Another is that hotel property can appreciate considerably. In the four years to 2006 the value of London’s Ritz hotel increased fourfold to 980 million Euros. Yet stock market valuations often fail to reflect rising property valuations, and investors do not like hotel groups tying up so much capital in this way, says Simon Mezzanotte of Société Générale, a bank. 
	Some 60-70% of the costs of an hotel whoseproperty is owned by the hotel chain, are pretty much fixed, including mortgage payments, taxes and energy bills, reckons Bjorn Hanson of New York University. He therefore sees the rationale for separating ownership and management, since asset-light firms, having more variable costs, have more scope for efficiency gains. In those that they manage, they get 12.5% of gross revenues, an attractive margin. 
	The attraction of franchising is that it is the quickest way to expand. All the hotel group provides is its brand and its online reservation system in return for a cut of the takings. But it is risky, because the hotel is putting the brands that it has spent decades painstakingly nurturing in the hands of outsiders. For this reason, Marriott rarely franchises outside America, where it has 2,246 such outlets. And Accor says it would never franchise in China, where it manages 100 hotels, because it does not know the market, the people and the culture well enough. “Franchising has the highest risk and potentially the least reward,” worries Stephen Broome of PWC, a consultancy.
	Despite such worries, Accor will apparently rely in the future on franchised outlets to deliver a large share of the new rooms it is planning. Mr. Hennequin announced, recently, after being appointed CEO of the company, that Accor will sell 48 hotel buildings, for 367 million Euros, as part of a plan to liquidate some real estate holdings including 31 properties in France, 10 in Belgium, and 7 in Germany. This sale will cut debt by about 282 million Euros. Who better to lead it, then, than Mr Hennequin from McDonald’s, a company that knows plenty about maintaining a brand image while using franchises to expand around the world.
i) Please consider the paragraph: “Strategy discussions at Accor illustrate the hotel industry’s debate about its business model”. From the text, what is the strategy that Accor will follow in the future? How it is different from the strategy it was following before Mr. Hennequin was hired? Hint: please remember that strategy means making a choice about the business model of the firm. (20 points)
Una compañía formula su estrategia eligiendo un modelo de negocios que tendrá como consecuencia un posicionamiento competitivo, que típicamente se traduce en una ventaja, es decir, mejores resultados que los de su competencia. Para ello, se basa en sus recursos y capacidades, tanto las que tiene como las que necesita desarrollar para desarrollar el modelo de negocios.
El modelo de negocios se describe en términos simples como las respuestas a las preguntas: Who? , What?, How?
Accor es un conglomerado hotelero, que tiene múltiples negocios dentro de su core business hotelero. Por lo tanto, y copiando párrafos del texto, se descubre que:
WHO? ... Accor is a French hotel group which operates in over 91 countries …. which owns, operates and franchises 4,426 hotels ranging from economy to luxury on five continents….. Es decir, tiene múltiples formatos orientados a distintos tipos de clientes, desde hoteles de lujo hasta hoteles económicos. (5 puntos)
WHAT?.... hotels in the low-, medium- and high-range price brackets (5 puntos)
HOW?.... asset right, lo que significa que tienen un portfolio de hoteles, en que es la cadena hotelera con mas hoteles propios. …… Of these 28% will be franchised to other hotel operators, 30% will be managed but not owned by Accor and the rest, 42%, will be fully owned or leased. (5 puntos) 
Al parecer, la discusión en el directorio fue sobre si seguir una estrategia de assett right (activos correctos) o assett light (liviana en activos) . Aparentemente Gilles Pellison prefería una estrategia con muchos hoteles propios. Ello debe haber implicado que tenían mucha deuda ( no lo dice el texto, pero se puede inferir del último párrafo, en que dice que van a vender hoteles para reducir deuda). El directorio por el contrario quería cambiar el HOW. Querían seguir una estrategia de asset light, como otras grandes cadenas y franquiciar muchos hoteles. Por eso traen al gerente de MacDonald’s en Europa , experto en operación de franquicias. (5 puntos)
De modo que no parece haber un cambio en el Who ni en el What, sino que en el HOW.- 
j) What are the advantages and disadvantages of an ‘asset right’ versus an ‘asset right’ strategy? Hint: in your answer please consider how each strategy impacts: first, the value creation of a hotel chain and, second, the value capture of a hotel chain. (10 points) 
Por lo que dice el texto:
Asset right tiene varias ventajas y desventajas.
	Ventajas: 
· absolute control over the hotel and its maintenance - se controla mejor la propuesta de valor, el What, ya que los hoteles funcionan de acuerdo a estándares preestablecidos de calidad. (1 punto)- creación de valor 
· hotel property can appreciate considerably- se gana plusvalía (1 Punto) captura de valor
· el margen es mejor….. In those that they manage, they get 12.5% of gross revenues, an attractive margin. (1 punto) creacion y captura 
	Desventajas: 
· por razones evidentes, hay que invertir en edificios, se crece mas despacio y (1 punto) creación de valor 
· requiere mas capital, se crece con deuda. (1 punto) captura de valor 
Asset light es todo lo contrario: 
	Ventajas: 
· it is the quickest way to expand…..se crece mas rápido (1 punto) creacion de valor 
· Requiere poco capital….. sin deuda (1 punto) captura de valor 
	Desventajas
· Es riesgoso, por la falta de control sobre la franquicia, se puede echar a perder el WHAT…. But it is risky, because the hotel is putting the brands that it has spent decades painstakingly nurturing in the hands of outsiders. (1 punto)creacion de valor 
· Concentra el esfuerzo en los costos variables … asset-light firms, having more variable costs, have more scope for efficiency gains. (1 punto) captura de valor
· Tiene un potencial de creación de valor mas bajo…. All the hotel group provides is its brand and its online reservation system in return for a cut of the takings.….“Franchising has the highest risk and potentially the least reward,” (1 punto)
De modo, que considerando las dos palancas de las que hablamos en la primera sesión, el directorio se inclinaba por menos rentabilidad (mas franchising) y mas crecimiento….para eso trajo a Hennequin. Pellison quería menos crecimiento y mas rentabilidad (mas hoteles propios).
Question Nº 2 
A recent report in the news announced the following: 
Cut in E-Book Pricing by Amazon Is Set to Shake Rivals
By DAVID STREITFELD, Published: April 11, 2012 
 	Today, Amazon announced plans to push down prices on e-books by more than 30%. The price of some major book titles could fall to $9.99 or less, from $14.99, saving voracious readers a bundle. Amazon is already the dominant force in the e-book industry with the Kindle reader. 
	Electronic books have been around for more than a decade, but took off only when Amazon introduced the first Kindle e-reader in 2007. It immediately built a commanding lead. At one point, before other competitive e book readers were launched by traditional book retailers, like Barnes and Noble, Amazon had 90 percent of the market for e-books. 
	The Amazon Kindle is a series of e-book readers now in its fourth generation. Amazon Kindle e- readers enable users to shop for, download, browse, and read e-books, newspapers, magazines, blogs, and other digital media via wireless networking. 
	Kindle hardware has evolved from the original Kindle introduced in 2007 and a Kindle DX line (with a larger screen) introduced in 2009. Announced in September 2011, the range now includes devices with keyboards (Kindle Keyboard), devices with touch sensitive screens (Kindle Touch), a tablet computer with a reader app and a color display (Kindle Fire) and a low-priced model with an on-screen keyboard (Kindle). Content for the Kindle can be purchased online and downloaded wirelessly in most countries, using standard Wi-Fi. 
	Apple’s introduction of the iPad, in early 2010, seemed to set the base for a formidable competitionin the e books market. But, Amazon has responded making his e-books available in all competing readers, introducing Kindle software for use on various devices and platforms, including Microsoft Windows, iOS, BlackBerry, Mac OS X, Android, webOS, and Windows Phone. Amazon also has a "cloud" reader to allow users to read, and purchase, Kindle books from a web browser. 
	Amazon already controls about 60 percent of the e-book market, and observers comment that the company can take a loss on every book it sells to gain market share for its Kindle devices. When it has enough competitive advantage, it will be able to dictate its own terms; something publishers say is beginning to happen. 
	In the last three months of 2010, Amazon announced that in the United States, their e-book sales had surpassed sales of paperback books for the first time. Traditional bookstores, which have been under pressure from the Internet for years, fear that the price gap between the physical books they sell and e-books from Amazon will now grow so wide they will lose what is left of their market. Barnes & Noble stores, whose Nook is one of the few popular e-readers that is not built by Amazon, could suffer the same fate, analysts say.
 Kindle by Amazon
g) Please consider the following paragraph in the text of the question: ‘Today, Amazon announced plans to push down prices on e-books by more than 30%’. In class we discussed similar pricing tactics mentioning that it was quite common that companies do these significant price cuts. Please explain the logic behind Amazon’s price cut. Why is Amazon cutting prices? 
Hint: the answer should have two parts: first, identify the phenomenon of deep price cuts in industries; second, why does the phenomenon happen. (20 points)
Hay dos explicaciones posibles:
a.1) que Amazon ha experimentado rebajas de costos como efecto de las curvas de experiencia y esta tratando de echar del Mercado a los competidores menos eficientes, usando su liderazgo en costos, en lo que denominamos el shake out. 
a.2) simplemente es lo que Amazon quiere hacer es desplazarse por la curva de demanda hacia abajo y afuera, vendiendo mas: ver grafico
 (
P
Q
D
D
O
1
0
1
0
2
0
2
0
1= actual 
0
2 = después de la baja de precios 
P
1
 Q
1
P
2
Q
2
)
h) What are the limitations (or perils) of such a strategy? (10 points)
 
Question 3.- 
The case Adolph Coor’s in the brewing industry ends with the following paragraph:
Coors’s plan for multi-site expansion
As Coor’s began its national roll out, concern about the 25-30 million barrels ceiling on capacity at the Golden site and about the increase in shipping distances prompted it to study a second production site. By 1979, it had identified two possible locations: one in Rockingham County, Virginia, on the Shenandoah River and the other in Anson County, North Carolina, in the Pee Dee River. In 1981, it completed the acquisition of 2,100 acres of land in the Rockingham County. And in August 1985, it announced plans to construct a 10 million brewery plant there.
The construction was to proceed in two phases. In the first phase, for which ground had been broken in November 1985, Coors would add a 2.4 million barrel packaging facility that would bottle and can beer shipped in refrigerated rail cars from Golden. The packaging facility would cost $95 million dollars and to start up in spring 1987. Coors estimated that it would reduce the cost of shipping beer to the East Cost by $2.50 dollars per barrel, helping the company complete its national roll out.
In the second phase, which had not yet been committed to, the facility would be expanded into an integrated 10 million barrel per year brewery. Analysts thought that the second phase might cost $ 500 - $600 million dollars and reduce transportation costs by another $2.50 per barrel. They also noted that to construct the brewery, Coors would probably have to resort to external financing for only the second time in its history. The idea of issuing debt, however, continued to be resisted by Jeff and Peter Coors.
Considering the information in the case, which we discussed in class, please answer the following question: Should Coors build the second phase of the plant, an integrated 10 million barrel per year brewery in Virginia? Will it be able to improve its competitive position significantly? (10 points) 
A simple payback calculation shows that it would take Coors many years to get back its money:
10 million barrels x $ 5 savings per barrel per year = $50 million dollars, implies a 10 to 12 year payback with an investment of 500 to 600 million dollars.. 
And, then Coors would have to sell the additional volume in the East Coast, in a mature market with two big rivals…..not an easy target to achieve given the strength of its competitors. If they do not sell the incremental volume, the payback would be an eternity.
Given the above, the decision should be not to build the brewery and to grow through consolidation of the industry, as we saw they have done later. ….. merging with Molson and , more recently, Miller.. 
Course: Leadership and Business Strategy , EAA 305a
First Quarter 2011 Mid term exam
Please write your name in all pages. You may answer in English or in Spanish. 
This is an “open book” exam. Time: 80 minutes. Please be brief in your answers
Question 1. - (20 points) 
Nike Inc. Case
Nike, Inc. (NYSE: NKE) is a major publicly traded sportswear and equipment supplier based in the United States. The company is headquartered in Oregon, near the Portland metropolitan area. It is the world's leading supplier of athletic shoes and apparel and a major manufacturer of sports equipment with sales revenue in excess of US$21.7 billion in its fiscal year 2010. As of 2010, it employed more than 34,400 people worldwide. 
Fortune magazine ranked Nike Nº 24 in its most recent World’s most admired companies ranking. The company is recognized for its global reach. Its strategic plan calls for global growth to help boost sales revenue more than 40% to US$27 billion by 2015. 
Nike has contracted with more than 700 manufacturing shops around the world and has offices located in 45 countries outside the United States. Most of the factories are located in Asia, including Indonesia, China, Taiwan, India, Thailand, Vietnam, Pakistan, Philippines, and Malaysia. Nike is hesitant to disclose information about the suppliers it works with. However, due to harsh criticism from some organizations like CorpWatch, about the working conditions and infant workers in these plants, Nike has recently disclosed information about its contract factories in its Corporate Governance Report.
Nike markets its products under its own brand as well as Nike Golf, Nike Pro, Nike+, Air Jordan, Nike Skateboarding and subsidiaries including Cole Haan, Hurley International, Umbro and Converse. In addition to manufacturing sportswear and equipment, the company operates in the US retail stores under the Niketown name. 
Nike sponsors many high profile athletes and sports teams around the world, with the highly recognized trademarks of ‘Just do it’ and the ‘Swoosh’ logo. Different markets favor different athletes. In China, for example, Nike sponsors Kobe Bryant, the NBA basketball star, who – believe it or not- is far more popular in China than in the U.S., hosting his own reality show and making an annual cross country fan tour. Sponsoring him gives Nike cachet with the burgeoning Chinese middle - class consumers new to the brand.
The early years
Nike, originally known as "Blue Ribbon Sports", was founded by University of Oregon track athlete Philip Knight and his coach Bill Bowerman in January 1964 and officially became Nike, Inc. in 1978. The company takes its name from Nike (Greek Νίκη), the Greek goddess of victory. The company initially operated as a distributor for Japanese shoe maker ASICS, making most sales at track meets out of Knight's automobile. 
The company's profits grew quickly,and in 1967, BRS opened its first retail store, located on Pico Boulevard in Santa Monica, California. By 1971, the relationship between BRS and ASICS was nearing an end. BRS prepared to launch its own line of footwear, which would bear the newly designed ‘Swoosh’ by Carolyn Davidson. The ‘Swoosh’ was first used by Nike in June 1971. 
The company's first self-designed product was based on Bowerman's "waffle" design. After the University of Oregon resurfaced the track at Hayward Field, Bowerman began experimenting with different potential outsoles that would grip the new urethane track more effectively. His efforts were rewarded one Sunday morning when he poured liquid urethane into his wife's waffle iron. Bowerman developed and refined the so-called 'waffle' sole which would evolve into the now-iconic Waffle Trainer in 1974.
By 1980, Nike had reached a 50% market share in the U.S. athletic shoe market, and the company went public in December of that year. Its growth was due largely to 'word-of-foot' advertising (to quote a Nike print ad from the late 1970s), rather than television ads. Nike's first national television commercials ran in October 1982 during the broadcast of the New York Marathon. 
Nike's marketing strategy is an important component of the company's success. Nike is positioned as a premium-brand, selling well-designed and expensive products. Nike lures customers with a marketing strategy centering on a brand image which is attained by a distinctive logo and the advertising slogan: "Just do it". Nike promotes its products by sponsorship agreements with celebrity athletes, professional teams and college athletic teams. Together, Nike and Wieden+Kennedy, its advertising agency, have created many print and television advertisements and the agency continues to be Nike's primary advertising agency today. It was agency co-founder Dan Wieden who coined the now-famous slogan "Just Do It" for a 1988 Nike ad campaign, which was chosen by Advertising Age as one of the top five ad slogans of the 20th century. Wieden credits the inspiration for the slogan to "Let’s do it", the last words spoken by Gary Gilmore before he was executed. 
Nike also has earned the Emmy Award for best TV commercial twice since the award was first created in the 1990s. The first was for "The Morning After," a satirical look at what a runner might face on the morning of January 1, 2000 if every dire prediction about Y2K came to fruition. 
Throughout the 1980s, Nike expanded its product line to include many other sports and regions throughout the world. 
Globalization
China is a market that is the company’s biggest growth engine and the company was forced to adapt its business model. Nike’s retail strategy in the U.S., is to run a small number of Niketown stores and sell mostly through national retail chains. But since China has fewer malls, the company had to alter its plan, opening more than 5,000 shops with retail partners – many of them small boutiques focusing on a single sport. Without retail chain competition, there is less discounting – one reason profit margins in China are 37% compared with 23% in North America. It’s a model Nike may bring back to the U.S.: it launched a basketball – specific ‘House of Hoops’ store with Foot Locker in 2007 and added nine new locations last fall.
The company is recognized also by its boldness. One example is its strategy in soccer, a US$ 2 billion business for Nike, but back in 1994, sales were just US$ 40 million. During the World Cup that year, Nike executives persuaded founder Phil Knight to make a big push into the sport as a way to enter international markets. In 1995 it signed the world renowned Brazilian national team to a 10 year sponsorship deal; in 2008 the company bought Umbro, an influential soccer brand in Europe. Nike now dominates the sport. 
Questions:
a) Is Nike a ‘successful’ company? Why? If you think there is not enough information in the case to provide an answer, please say so.(5 points)
b) China is, as the case says, ‘the biggest growth engine’ for Nike. Please explain in theoretical terms why ‘growth’ is important for Nike, or any other company! (5 points
c) Nike’s strategy has been changing over the last three decades. Please describe briefly, Nike’s current strategy in China (10 points)
Question 2.- (40 points)
In a presentation done by the CEO of a brewery in the United Kingdom to analysts/investors, in December 2010, the CEO discussed the next slide which supposedly presents the company’s strategy and objectives:
Please focus your attention in slide above. Please explain briefly, considering the class materials when you answer:
2a) why does the brewery have as a key objective to ‘maintain or grow market share’? (10 points) 
2b) Breweries measure volume sold in ‘barrels’. How can the company ‘increase revenue per barrel’? Is there any risk in this strategy? How can this risk be avoided? (10 points)
2c) It is interesting to note that ‘Smart Cost Management’ is a pillar of the beer company strategy, presented at the same level of importance as Branding and Innovation. Please provide an explanation why Smart Cost Management is so important, even in a company which obviously relies on differentiation as its generic competitive strategy. (10 points)
2d)In another section of her report, the CEO mentioned that the industry was plagued with problems: excess capacity of competitors which pushes prices down, declining demand due to substitution by alternative alcoholic beverages (wine, in particular), legal restrictions on sales, etc. Considering the framework we saw in class about industry evolution, what stage is the beer industry in the UK and Ireland in? Why? What strategic options does a company have, to create value, in such an industry? (10 points)
Question 3.- (10 points)
In the class on cost advantages, Koljatic said that the perspective on costs had changed in the past decades as costs changed from being a significant issue in pricing decisions and management control to being an ‘ input’ in strategic planning. This question is about this change in perspective. For this question we will rely on an article in Fortune’s magazine April 4, 2001 issue, which reads as follows:
Flight Patterns: Where the money goes.
 Ever wonder what’s behind the rising price of an airline ticket? The cost breakdown may surprise you. 
‘The journey begins on a Delta Boeing 737 in Los Angeles. A 23 minute boarding time and a 24 minute taxi to the runway cost the airline more than $1000 in fuel, labor and maintenance. Flying to a layover in Detroit runs $11,674 ; getting to the gate, another $ 309. Taxiing alone can cost $ 3,611 on a round trip flight from LAX to LGA. Managing those costs is tricky. Actually flying is only about half of an airline’s expenses – see chart Economic Structure of a Flight from LAX to LGA .
Although the industry performed better last year after a lousy decade, rising fuel prices are taking a toll: a ticket that would have made $33 in 2010 now makes $ 4. And if you fly
economy on a competitive route, like this one, the airline is probably in the red.’ 
In class we discussed several times the airline industry. The ‘forces’, in Porter’s terminology , are very negative and it is difficult to create value in this industry; in short, we concluded that the airline industry is not an ‘attractive’ industry. 
Now, Fortune’s article gives us additional information which may be used to better understand why this industry is so difficult. Please do a careful analysis of the table above and explain how the cost structure of a flight provides us with reasons to better explain why the airline industry is not attractive. 
In other words, your teacher thinks that the attractiveness or lack of attractiveness of the airline industry stems from the cost structure of the industry.
 What is being asked from you is to briefly explain , combining the cost structure information provided by Fortune and the 5 forces model developedby Porter, why is it that this industry is not attractive. 
HINT: Your teacher thinks that the analysis will be stronger if you make a quantitative analysis of the cost information and look into the reasons Porter gives for increased rivalry in an industry.
PAUTA
Course: Leadership and Business Strategy , EAA 305a
First Quarter 2011 Mid term exam
Questions:
a) Is Nike a ‘successful’ company? Why? If you think there is not enough information in the case to provide an answer, please say so.(5 points)
Probably yes. 
Following the two slides on stakeholder theory we saw in class :
· “A successful manager will lead the organization to results which satisfy all the stakeholders. These results are related to legitimate value creation for the shareholders, clients, workers and society. “ 
· It has to be accepted that there are trade - offs in the capture each stakeholder gets from value creation. 
· The score card, however, is measured in terms of value creation; we have to settle for a metric based on the wealth of the shareholders (owners). 
· In the business world, like in sports, goals are the final measure of success, success is ultimately measured by stock prices.
We may think that the customers are happy. The sales level and growth indicate that this company is almost certainly satisfying its customers needs and desires, very well. 
We do not have information about the employees. In fact, probably the direct employees are quite happy, but not the contract workers who work in the factories in Asia. 
Same about the society….the NGO that complains about working conditions in the factories reflect a negative view in the countries in which Nike operates. 
However, the most important indicator about success is the share price, because prices in the stock exchanges capture all the information in the market about the company (following the efficient market theory). 
It is highly probable that Nike is making loads of money for its shareholders (the high margins the company has give us a proxy for value creation for shareholders)…..but we do not have information in the case about the bottom line nor about the price of the Nike stock. Without this information we cannot answer the question. So in summary, we do not know.
b) China is, as the case says, ‘the biggest growth engine’ for Nike. Please explain in theoretical terms why ‘growth’ is important for Nike, or any other company! (5 points)
First, we saw in class the Gordon formula to value stocks which directly talks about growth and its importance for all companies.
 In the denominator we find (‘ r ‘ minus ‘g’), where ’g’ is the expected growth of returns to shareholders. If g is high, share prices go up. If growth is low, share prices go down. So growth is critical in the stock price…..
Second, growth provides opportunities for employees and management to progress in their careers. Although we have not talked about this factor in class, and is not part of the expected answer….it is important for motivation, and motivation is important to fuel creativity and ‘intrapreneurship’ in companies. 
c) Nike’s strategy has been changing over the last three decades. Please describe briefly, Nike’s current strategy in China (10 points)
Following Markides paper, strategy relates to the answers of three questions: Who, What, How. 
In the case of Nike in China, we could find in the Fortune article the following information:
Who : the burgeoning Chinese middle class
What: their line of shoes and athletic equipment
How : 
· small boutiques focusing on a single sport 
· advertising using famous athletes , like Kobe Bryant 
That is all, folks!
2a) Why does the brewery have as a key objective to ‘maintain or grow market share’? (10 points) 
From the mid 70’s we know that market share has a positive correlation with profitability (PIMS; BCG). 
Two causes:
1) High market shares imply a high operational leverage, which in turn implies lower average unit costs, which in turn implies higher margins. Through scale effects, market share lowers average costs. 
2) High market shares imply high market power, which implies high negotiation power with suppliers and clients. Additionally, a dominant competitor will probably face less competition, because rivals will not dare contest with the dominant firm.
2b) Breweries measure volume sold in ‘barrels’. How can the company ‘increase revenue per barrel’? Is there any risk in this strategy? How can this risk be avoided? (10 points)
Increasing prices, either by increasing willingness to pay and thus being able to command higher prices from consumers or by reducing margins to intermediaries (distributors, wholesalers or retailers), extracting higher rents from them. This second alternative may be discovered by examining the value chain of the company.
2c) It is interesting to note that ‘Smart Cost Management’ is a pillar of the beer company strategy, presented at the same level of importance as Branding and Innovation. Please provide an explanation why Smart Cost Management is so important, even in a company which obviously relies on differentiation as its generic competitive strategy. (10 points)
As Porter says in his 1996 article, What is strategy?; operational effectiveness is a key condition in achieving success. Smart cost management moves the company out and up towards the productivity frontier in the industry in which it competes.
2d)In another section of her report, the CEO mentioned that the industry was plagued with problems: excess capacity of competitors which pushes prices down, declining demand due to substitution by alternative alcoholic beverages (wine, in particular), legal restrictions on sales, etc. Considering the framework we saw in class about industry evolution, what stage is the beer industry in the UK and Ireland in? Why? What strategic options does a company have, to create value, in such an industry? (10 points)
Declining industry…..sales are declining, there is excess capacity, prices are decreasing (deflation), etc.
From the slide on declining industries:
· Consolidation….buying other breweries
· Niche playing…..finding a segment in the market in which the company may defend itself, harvesting the brand
· Exiting the industry, selling to a competitor
3) Airline costs
Practically all costs items, except for ‘food and beverage’ and ‘ agents commission’s’ are fixed. Hence, excluding profits (7%), food and beverage ( 1%) and agents commission’s (1%), 91% of the cost structure is fixed! 
Now, high fixed costs increase rivalry (please refer to the attached slide from the class on the Porter model). The fixed cost structure impacts on profitability because it forces companies to fight for volume (this is a ¨volume driven business¨)….when demand drops, prices drop and profits drop. Not an attractive industry.
Course: Leadership and Business Strategy , EAA 305a
First semester 2010 Mid Term Exam
Please write your name in all pages. 
You may answer in English or in Spanish. 
This is an “open book” exam.
Question Nº 1
An article in the April 3rd – 9th issue of The Economist, the British magazine, is reproduced below:
These are not easy times for traditional retail booksellers. Borders, a big American chain of book stores, fired its CEO in January and has closed stores, but it is still at risk of collapse, some analysts say. The British chain of the same name, which it once owned, filed its bankruptcy last year. The world’s biggest retail chain of bookstores, Barnes & Noble (in short B&N), appointed a new boss last month to help it confront the triple threat of the recession, increased competition and the e – books.
The struggles of retail booksellers can be explained in part by a surge in competition. More than half book sales in America take place not in book shops but at big retailers such as Wal-Mart and Target, which compete to sell books at ever steeper discounts. Online retailers, too, are wreaking havoc. In 2009 Amazon sold 19% of printed books in North America,compared with Barnes & Noble 17% and Borders 10%. By 2015, it is estimated, Amazon will sell 28%.
Booksellers are trying to raise their profile online and win back the customers they have lost. Barnes & Noble online sales rose by 32% to $210 million in the quarter ending in December, compared with a year earlier. It has started selling its own e-reader, called the “Nook”, and digital books go with it.
Will bookshops disappear completely? Most are pinning their hopes on giving people more reasons to come inside. “Consumers will need some entity to help them make sense of the situation”, says William Lynch, the new boss of Barnes & Noble, which plans to put renewed emphasis on service, including advice on e – books.
Many shops have started to offer free internet access to keep customers there longer and to enable them to download e-books. Other survival strategies include hosting book clubs or other community groups and selling a wider variety of goods, such as wrapping paper, cards and toys.
Independent bookshops face a particularly grave threat, because they are unable to match bigger rivals’ prices. Many are branching out by offering new services, such as creative writing classes. Book People, a bookshop in Austin, Texas, runs a literary summer camp for around 450 children. Steve Bercu, the shop’s owner, says that independent booksellers will strive, provided they “reinvent themselves”. 
 Please answer the following questions: 
1.1. - The Economist describes the challenges the retail bookselling industry is facing today. You are requested to do a strategic analysis of this industry applying the methodologies we have reviewed in the course. (20 Points)
1.2. - The article identifies several initiatives that traditional retail booksellers are executing to counter the challenges in the industry. As an obvious response, bookstore chains, like Barnes and Noble (B&N), are trying to increase their online sales. How does this strategic initiative reinforce B&N competitive position? What are the limitations of this strategy? Will this initiative “save” the business of selling books in “brick and mortar” (traditional retail) stores? Explain. (10 points)
1.3. – Traditional booksellers are also using other strategies to reinforce their position. Now, consider Barnes & Noble’s response, which is summarized in the following paragraph:
 “Consumers will need some entity to help them make sense of the situation”, says William Lynch, the new boss of Barnes & Noble, which plans to put renewed emphasis on service, including advice on e – books.”
You are requested to appraise this strategic thrust, doing a strategic analysis of this initiative by Barnes & Noble, applying the methodologies we have reviewed in the course. (10 points)
1.4. – Amazon typically sells books online at a discount vs. the prices at Barnes & Noble stores. For instance, John Grisham’s novel ‘The Associate’, a recent best seller, is sold for $15 dollars at amazon.com while it retails for $20 dollars in Barnes & Noble retail stores. 
A full comparison of list prices, considering a sample of two thousand different titles, shows that Amazon sells with a 25% discount vs. B&N list prices. This price advantage for amazon.com is somewhat reduced by the delivery charges so, the difference is reduced to 15%, approximately. In short, if a customer pays $100 dollars for a book in a Barnes & Noble bookstore, she pays $85 dollars for the same book if purchased from amazon.com.
John Smith, a stock broker working with information from Barnes & Noble and Amazon’s financial reports (profit and loss statements) calculated the following income statement structure (as a % of sales) for both companies:
				 Income Statement Structure (as % of sales) 
				 Barnes & Noble (retail)		amazon.com
					 % %
Revenues 100 100
Cost of Goods Sold 65 76
Gross profit 35 24
Rental Expenses 19 0
Selling, General and Adm. Expenses 15 15 
Operating Income 3 9 
From the above information, John Smith concluded that amazon.com has a competitive advantage vs. B&N. The analyst made the following comment: “Although Amazon has a higher cost of goods sold than B&N, it has a competitive advantage given the fact it does not pay for rental of retail sores.” 
Another analyst, Elisa Moreno, said: “Mr. Smith is right in saying that amazon.com has a competitive advantage. However, it is puzzling in his figures that Barnes and Noble has a lower cost of goods sold, given the fact that these two companies have similar negotiating power when buying books from their suppliers (publishers) as they buy in large quantities.” Is Mr. Smith right in saying that Barnes and Noble has a lower cost of goods sold? (10 points) 
Question 2 
A market research agency made a survey of prices on April 4, 2010, in the web pages of Jumbo and Líder Supermarkets for a basket of 17 frequently purchased packaged goods.
Mrs. Soledad Arcos, CEO of the market research agency commenting the information, remarked that in 11 of the products in the basket, Jumbo was more expensive; while for the other 6 Líder was more expensive. Assuming one unit in each basket for each product, the total price to be paid was $30,739 pesos if bought from Líder and $31,515 if bought from Jumbo, so that Jumbo is 2.5% more expensive in this basket. Details of the results of this survey are reported below:
Assuming that the survey is a statistically valid representation of the universe of prices of these two supermarket chains, please answer the following questions:
2.1.- What can we conclude from this pricing differential regarding the generic strategies these two supermarket chains are following? Explain. (10 points) 
2.2. – What are the drivers behind their competitive advantages which are common to both supermarket retail chains? Name only two drivers and explain (10 points) 
Question 3.- 
The case Adolph Coor’s in the brewing industry ends with the following paragraph:
Coors’s plan for multi-site expansion
As Coor’s began its national roll out, concern about the 25-30 million barrels ceiling on capacity at the Golden site and about the increase in shipping distances prompted it to study a second production site. By 1979, it had identified two possible locations: one in Rockingham County, Virginia, on the Shenandoah River and the other in Anson County, North Carolina, in the Pee Dee River. In 1981, it completed the acquisition of 2,100 acres of land in the Rockingham County. And in August 1985, it announced plans to construct a 10 million brewery plant there.
The construction was to proceed in two phases. In the first phase, for which ground had been broken in November 1985, Coors would add a 2.4 million barrel packaging facility that would bottle and can beer shipped in refrigerated rail cars from Golden. The packaging facility would cost $95 million dollars and to start up in spring 1987. Coors estimated that it would reduce the cost of Shopping beer to the East Cost by $2.50 dollars per barrel, helping the company complete its national roll out.
In the second phase, which had not yet been committed to, the facility would be expanded into an integrated 10 million barrel per year brewery. Analysts thought that the second phase might cost $ 500 - $600 million dollars and reduce transportation costs by another $2.50 per barrel. They also noted that to construct the brewery, Coorswould probably have to resort to external financing for only the second time in its history. The idea of issuing debt, however, continued to be resisted by Jeff and Peter Coors.
Considering the information in the case, which we discussed in class, please answer the following question: Should Coors build an integrated 10 million barrel per year brewery in Virginia? Will it be able to improve its competitive position significantly? (10 points) 
Course: Leadership and Business Strategy , EAM 380
First semester 2010 Mid Term Exam
Please write your name in all pages. 
You may answer in English or in Spanish. 
This is an “open book” exam.
Question Nº 1
An article in the April 3rd – 9th issue of The Economist, the British magazine, is reproduced below:
These are not easy times for traditional retail booksellers. Borders, a big American chain of book stores, fired its CEO in January and has closed stores, but it is still at risk of collapse, some analysts say. The British chain of the same name, which it once owned, filed its bankruptcy last year. The world’s biggest retail chain of bookstores, Barnes & Noble (in short B&N), appointed a new boss last month to help it confront the triple threat of the recession, increased competition and the e – books.
The struggles of retail booksellers can be explained in part by a surge in competition. More than half book sales in America take place not in book shops but at big retailers such as Wal-Mart and Target, which compete to sell books at ever steeper discounts. Online retailers, too, are wreaking havoc. In 2009 Amazon sold 19% of printed books in North America, compared with Barnes & Noble 17% and Borders 10%. By 2015, it is estimated, Amazon will sell 28%.
Booksellers are trying to raise their profile online and win back the customers they have lost. Barnes & Noble online sales rose by 32% to $210 million in the quarter ending in December, compared with a year earlier. It has started selling its own e-reader, called the “Nook”, and digital books go with it.
Will bookshops disappear completely? Most are pinning their hopes on giving people more reasons to come inside. “Consumers will need some entity to help them make sense of the situation”, says William Lynch, the new boss of Barnes & Noble, which plans to put renewed emphasis on service, including advice on e – books.
Many shops have started to offer free internet access to keep customers there longer and to enable them to download e-books. Other survival strategies include hosting book clubs or other community groups and selling a wider variety of goods, such as wrapping paper, cards and toys.
Independent bookshops face a particularly grave threat, because they are unable to match bigger rivals’ prices. Many are branching out by offering new services, such as creative writing classes. Book People, a bookshop in Austin, Texas, runs a literary summer camp for around 450 children. Steve Bercu, the shop’s owner, says that independent booksellers will strive, provided they “reinvent themselves”. 
 Please answer the following questions: 
1.1. - The Economist describes the challenges the retail bookselling industry is facing today. You are requested to do a strategic analysis of this industry applying the methodologies we have reviewed in the course. (20 Points)
Industries may be analyzed with three methodologies:
PEST…BIG Threats, although information is scarce:
· Political …..no impact
· Economic…..recession decreases sales and profitability,
· Social…..no information, but we can assume from looking around that people spend less time reading books because of Face book, etc.; should decrease demand
· Technology ….e books are a big threat
In summary, the PEST analysis shows a very negative picture for the industry 
Industry evolution…..based on the information available , a declining industry in the USA and UK, outlook is not positive….companies should try to exit, or grow in other areas of the world, like emerging markets, where the industry is growing.
Six Forces…not an attractive industry
· Buyers….consumers are changing , going away from traditional bookstores, very sensitive to prices; only expensive books for presents (i.e. art, cuisine, etc.) which people want to tuch, look, before buying are the products which consumers would want to continue buying in stores….best sellers, text books, etc. are commodities….the consumer is price driven! 
· Suppliers have little negotiating power…they don’t care how their books are sold, as long as books are sold.
· New entrants….mass merchandiser like Wal-Mart and Target have the scale to compete effectively. Big threat, but not much can be done about it.
· Substitutes…..on line book sellers are an enormous threat, Amazon in particular.
· Rivalry…..as all retail book sellers are threatened….prices will go down!
· Complementors…..no information.
In summary, as The Economist says: “not an easy time for retail book stores”. B&N is stuck in an industry which is not attractive. This is a company in which the industry forces makes it very difficult to obtain superior returns ( approximately 15% of companies are in this kind of situation , where the industry determine your results….remember Rumelt’s analysis).
 They should exit the business…..but that is not an easy task….who is going to buy it? 
1.2. - The article identifies several initiatives that traditional retail booksellers are executing to counter the challenges in the industry. As an obvious response, bookstore chains, like Barnes and Noble, are trying to increase their online sales. How does this strategic initiative reinforce B&N competitive position? What are the limitations of this strategy? Will this initiative “save” the business of selling books in “brick and mortar” stores? Explain. (10 points) 
The main advantage is that it helps retail chains to maintain their SCALE in terms purchases of books and sales. If sales go down, unit costs go up as the bookstores loose operational leverage, deteriorating even further the economics of the book stores profit equation. By selling a lot of books on line, they maintain their negotiating power with suppliers and defend their cost position. [footnoteRef:3] [3: There are also some economies of scope in having both businesses, synergies such as warehousing of books and in purchasing….but this is not part of the answer since we will cover this subject in corporate strategy..] 
The big limitation is that online book selling is totally different from their current business….it requires a system of activities which is totally different from that of selling books in a store. Hence, the system of activities for online bookselling has its own cost structure and the online business will have to achieve a minimum scale to be efficient. If the online business does not achieve the minimum scale, the advantages gained through the incremental volume will be offset by the additional costs. 
Nobody knows whether the online business will be able to save the retail business, probably not, given the first mover advantage of Amazon (network effects – winner takes all).The best alternative for B&N probably is not to do the online business on their own, but to join efforts with another successful online provider, such as Yahoo or Google. Why not sell books through them in a strategic alliance?
1.3. – Traditional booksellers are also using other strategies to reinforce their position. Now, consider Barnes & Noble’s response, which is summarized in the following paragraph:
 “Consumers will need some entity to help them make sense of the situation”, says William Lynch, the new boss of Barnes & Noble, which plans to put renewed emphasis on service, including advice on e – books.”
You are requested to appraise this strategic thrust, doing a strategic analysis of this initiative by Barnes & Noble, applying the methodologies we have reviewed in the course. (10 points)
B&N boss wants to achieve a differentiation advantage based on service. It is interesting to notice that Mr. Lynch hasalready surrendered to Amazon‘s growth, as his idea of service is centered around giving ‘advice on e books’. 
Differentiation can be built around product attributes, firm customer relationships and firm linkages. Mr. Lynch’s idea seems to be to strengthen the firm-customer relationship, in particular following a customization strategy: giving advice on e books. When you give advice, you are customizing your offering. This idea was explained in class with the following slide:
The correct answer is not complete, however, just identifying differentiation as the generic strategy our friend Lynch is following. The problem with Mr. Lynch’s strategy is that he is not addressing the three fundamental questions in strategy: Who? What? How? 
Yes, he is addressing the what? .... Offering a better service and trying to differentiate B& N on that base.
This is not an easy endeavor: do clients need advice? Is it true that they need help in making sense of the situation? We do not know, but let’s accept this is correct. 
However, it is not enough to manipulate one of the variables…a strong strategy addresses the three questions in an innovative way. The question what value proposition is he building, answering the who?, what? and how? questions.
 He is not addressing the WHO question. Which segments are going to be his customers? What is the target for his strategy? His client base is shrinking…..customers are going away! He should build a robust value proposition for the customers….but who are the customers?
I imagine that the company’s strengths come from the retail chain. How can he use his stores to synergize the online business, targeting customers who live and work close to the B&N stores…..for instance, if the stores are in high traffic areas in big cities, that gives B&N a strong base to build loyalty. 
Third, he does not mention HOW he is going to compete. For example, one opportunity he has is in the delivery costs faced by customers who buy online…..he could deliver books at no cost if the online customer picks the book she purchased at a B&N bookstore. 
In short, improving service is not easy and then, the strategy seems to be incomplete, at least from what is reported by The Economist. 
1.4. – Amazon typically sells books online at a discount vs. the prices at Barnes & Noble stores. For instance, John Grisham’s novel ‘The Associate’, a recent best seller, is sold for $15 dollars at amazon.com while it retails for $20 dollars in Barnes & Noble retail stores. 
A full comparison of list prices, considering a sample of two thousand different titles, shows that Amazon sells with a 25% discount vs. B&N list prices. This price advantage for amazon.com is somewhat reduced by the delivery charges so, the difference is reduced to 15%, approximately. In short, if a customer pays $100 dollars for a book in a Barnes & Noble bookstore, she pays $85 dollars for the same book if purchased from amazon.com.
John Smith, a stock broker working with information from Barnes & Noble and Amazon’s financial reports (profit and loss statements) calculated the following income statement structure (as a % of sales) for both companies:
				 Income Statement Structure (as % of sales) 
				 Barnes & Noble (retail)		amazon.com
					 % %
Revenues 100 100
Cost of Goods Sold 65 76
Gross profit 35 24
Rental Expenses 19 0
Selling, General and Adm. Expenses 15 15 
Operating Income 3 9 
From the above information, John Smith concluded that amazon.com has a competitive advantage vs. B&N. The analyst made the following comment: “Although Amazon has a higher cost of goods sold than B&N, it has a competitive advantage given the fact it does not pay for rental of retail sores.” 
Another analyst, Elisa Moreno, said: “Mr. Smith is right in saying that amazon.com has a competitive advantage. However, it is puzzling in his figures that Barnes and Noble has a lower cost of goods sold, given the fact that these two companies have similar negotiating power when buying books from their suppliers (publishers) as they buy in large quantities.”
Is Mr. Smith right in saying that Barnes and Noble has a lower cost of goods sold? (10 points) 
Mr. Smith is wrong…..if the comparison is made at the per book basis, we see a different picture:
If we calculate the cost of goods sold in dollars and not in percentages, we will discover that Amazon sells a book at 85% of the price charged by B&N. The cost of goods sold has to be calculated on the actual prices, to understand the actual costs that Amazon faces. Assume a book in B&N costs 100 dollars and that the same book at Amazon costs 85 dollars. Hence the structure is:
			
		Pro forma Income Statement Structure in dollars and as % of sales 
				 Barnes & Noble (retail)		amazon.com
					 $ % $ %
Revenues 100 100 85 100
Cost of Goods Sold 65 65 65 76
Gross profit 35 35 20 24
Rental Expenses 19 19 0 0
Selling, General and Adm. Expenses 15 15 13 15 
Operating Income 3 3 7 9 
So the lower prices make cost of goods in dollars look higher. The correct analysis shows that both companies buy books at the same cost….which makes sense since they buy in similar volumes. 
 
Question 2. 
A market research agency made a survey of prices on April 4, 2010, in the web pages of Jumbo and Líder Supermarkets for a basket of 17 frequently purchased packaged goods.
Mrs. Soledad Arcos, CEO of the market research agency commenting the information, remarked that in 11 of the products in the basket, Jumbo was more expensive; while for the other 6 Líder was more expensive. Assuming one unit in each basket for each product, the total price to be paid was $30,739 pesos if bought from Líder and $31,515 if bought from Jumbo, so that Jumbo is 2.5% more expensive in this basket. 
Assuming that the survey is a statistically valid representation of the universe of prices of these two supermarket chains, please answer the following questions:
2.1.- What can we conclude from this pricing differential regarding the generic strategies these two supermarket chains are following? Explain. (10 points) 
 There is an element of both business level strategies (cost leadership and differentiation) in the actions of these companies. From experience we know that both companies advertise heavily. However, there would be little point in their advertising if they did not vigorously pursue cost leadership strategies. These firms need to generate large sales volumes to fully exploit their low per unit cost structure given the fact that they have many stores. Keep in mind that their advertising is not just for their intended customers. Their advertising is an important signal to competitors as well. As such, it is an important part of their cost leadership strategies. 
They havesimilar prices (Jumbo’s disadvantage is very small…..think about the prices you would pay for the same products at a convenience store like OK Market or Big John, who differentiate based on location). 
However, if called to summarize, one could say that Jumbo is following a differentiating strategy….the willingness to pay of its customers is slightly higher.
On the other hand, Líder is following a low cost strategy, appealing to lower prices to gain customer preference
2.2. – What are the drivers behind their competitive advantages which are common to both supermarket retail chains? Name only two drivers and explain.(10 points) 
Possible answers from which two have to be explained:
Cost drivers: 
Scale….both chains have to be cost competitive as explained before.
Differentiation Drivers:
Consumer Marketing – creating brand loyalty through advertising 
Location….a critical discriminating factor when choosing the store in which we buy
Linkages among functions of the firm ….i.e.: financing and sales of products. Líder has the Presto cards vs .Jumbo’s Mas cards. 
Product mix…..although Jumbo tends to have bigger stores with more SKU’s 
Question 3.- 
The case Adolph Coor’s in the brewing industry ends with the following paragraph:
Coors’s plan for multi-site expansion
As Coor’s began its national roll out, concern about the 25-30 million barrels ceiling on capacity at the Golden site and about the increase in shipping distances prompted it to study a second production site. By 1979, it had identified two possible locations: one in Rockingham County, Virginia, on the Shenandoah River and the other in Anson County, North Carolina, in the Pee Dee River. In 1981, it completed the acquisition of 2,100 acres of land in the Rockingham County. And in August 1985, it announced plans to construct a 10 million brewery plant there.
The construction was to proceed in two phases. In the first phase, for which ground had been broken in November 1985, Coors would add a 2.4 million barrel packaging facility that would bottle and can beer shipped in refrigerated rail cars from Golden. The packaging facility would cost $95 million dollars and to start up in spring 1987. Coors estimated that it would reduce the cost of Shopping beer to the East Cost by $2.50 dollars per barrel, helping the company complete its national roll out.
In the second phase, which had not yet been committed to, the facility would be expanded into an integrated 10 million barrel per year brewery. Analysts thought that the second phase might cost $ 500 - $600 million dollars and reduce transportation costs by another $2.50 per barrel. They also noted that to construct the brewery, Coors would probably have to resort to external financing for only the second time in its history. The idea of issuing debt, however, continued to be resisted by Jeff and Peter Coors.
Considering the information in the case, which we discussed in class, please answer the following question: Should Coors build an integrated 10 million barrel per year brewery in Virginia? Will it be able to improve its competitive position significantly? (10 points) 
A simple payback calculation shows that it would take Coors many years to get back its money:
10 million barrels x $ 5 savings per barrel per year = $50 million dollars, implies a 10 to 12 year payback with an investment of 500 to 600 million dollars.. 
And, then Coors would have to sell the additional volume in the East Coast, in a mature market with two big rivals…..not an easy target to achieve given the strength of its competitors. If they do not sell the incremental volume, the payback would be an eternity.
Given the above, the decision should be not to build the brewery and to grow through consolidation of the industry, as we saw they have done later. ….. merging with Molson and Miller.. 
Course: Leadership and Business Strategy , EAA 305a
First semester 2009
First Mid Term Exam
Please write your name in all pages. You may answer in English or in Spanish.
Question Nº 1 
In the late 1990’s Monsanto embarked upon a strategy of becoming a life sciences company dedicated to using biotechnology to develop plants that would improve our ability to feed the people of the world. By 1999, Monsanto had spent over $8 billion acquiring smaller biotech companies to help the firm achieve its lofty goals. To fund this impressive growth and pursue the overall strategy, Monsanto began selling off its traditional chemical businesses that had been the backbone of the company. 
	By early 1998, Wall Street had rewarded Monsanto with a near doubling of its stock price since the strategy began. Robert Shapiro, the CEO and architect of this life sciences strategy, was hailed as a visionary industry leader. He and others in the company repeatedly extolled the virtues of the firm’s strategy. In their view, the firm had embarked upon a strategy that would improve the lives of millions of people through the use of biotechnology. Their technologies would help reduce the use of dangerous pesticides and herbicides, improve the nutritional value of foods, allow some common food plants to actually take on medicinal properties, and produce drought tolerant plants that could be grown more effectively in Africa. Everyone seemed to fully support the strategy—from farmers to food processors to U.S. consumers to investors.
	Things began to unravel for Monsanto with the introduction of genetically modified soybeans to Europe in the fall of 1996. The European Union had approved the importation of genetically modified foods. What began as questions and concerns soon turned into a public backlash. Europeans were not inclined to accept genetically modified food sources from a large American company. Several consumer groups soon began to demonize Monsanto for its efforts. Consumers vowed to avoid any products containing genetically modified foods. Soon food processors were promising not to use genetically modified foods in their products. Even large food retailers began claiming that they would not sell genetically modified foods. The zealous avoidance of genetically modified foods spread back across the Atlantic. In time food processors and restaurants in the U.S. were refusing to use genetically modified food sources. Even farmers who had used the genetically modified seeds for several years began refusing to use the seeds any longer.
	Within three short years, Monsanto had gone from being the darling of Wall Street to being a pariah. Finally in December of 1999, Monsanto announced its merger with Pharmacia-Upjohn. Monsanto was valued at $23.4 billion of which $23 billion was the value of Monsanto’s pharmaceutical division. In other words, the $8 billion of biotech investment Monsanto had made in the previous three or four years was almost worthless. 
What happened? How could Monsanto’s strategy have come apart so rapidly? (10 points)
Question 2 .-
a) Wal-Mart, Timex, Casio, and Hyundai are all cited as examples of firms pursuing cost leadership strategies, but these firms make substantial investments in advertising, which seems more likely to be associated with a product differentiation strategy. Are these firms really pursuing a cost leadership strategy or are they pursuing a product differentiation strategy by emphasizing their lower costs? Why do they advertise?
	 (10 points)
b) Firms engage in an activity called “forward pricing” when they establish, during the early stages of the learning-curve, a price for their products that is lower than their actual costs, in anticipation of lower costs later on, after significant learning has occurred. Under what conditions, if any, does forward pricing make sense? What risks, if any, do firms engaging in forward pricing face? (10 points)
c) Will a firm that has a competitive disadvantage necessarily go out of business? How about a firm with below average accounting performance over a long period of time? How about a firm with below normal economic performanceover a long period of time? (9 points)
d) A firm with a highly differentiated product can increase the volume of its sales. Increased sales volumes can enable a firm to reduce its costs. High volumes with low costs can lead a firm to have very high profits, some of which the firm can use to invest in further differentiating its products. What advice would you give a firm whose competition is enjoying this product differentiation and cost leadership advantage? (10 points)
Question 3: 
Chrysler Reintroduces the Hemi Engine
Chrysler has exploited several bases of differentiation with its reintroduction of the Hemi engine. Reintroduced in 2002, this engine was actually developed in the 1960’s. It was used in Chrysler’s muscle cars in the late 60’s and 70’s. In 1996, an engineering team headed by Robert E. Lee was assigned to develop a high power engine to use in Dodge pickups. At the time, Dodge pickups lagged behind Ford and GM pickups in power.
	Lee and his team decided to use the old Hemi design which gets its name from the hemispherical shape of the top of the engines cylinders. This hemispherical shape serves to concentrate the fuel and air at the top of the cylinder. Lee’s team also used two spark plugs in each cylinder. The shape of the cylinder head and the two spark plugs makes the engine much more powerful and efficient than other engines the same size. They also designed the new Hemi to be even more fuel efficient on the highway by shutting down four of the eight cylinders at highway cruising speeds. These product features added very little cost to the engine.
	Chrysler embarked on a marketing campaign that has met with huge success. This campaign attempts to tap into the nostalgia for the muscle cars of the 60’s and 70’s. Phrases from advertisements like “Well, it’s a Hemi”; “That thing got a Hemi?; and “It’s got a Hemi” have become popular, even among young people who had no idea what a Hemi engine was before the advertisements appeared.	 
	The Hemi engine is a pricey option, but customers are clamoring for the engine. On a Dodge Magnum, the Hemi adds about $5,000 to the price tag. Remember, the incremental cost to Chrysler is miniscule. Most of that $5,000 is pure profit. Forty-one percent of the Chrysler 300’s, 46% of Dodge Magnum’s, 72% of the new Dodge Charger’s, and 52% of the Dodge Durango’s are sold with the Hemi. In 2004, Chrysler sold almost 300,000 cars and pickups with the Hemi engine. The company had profits of $1.9 billion in 2004, when Ford and GM had large losses.
	The Hemi brand has become very popular. Chrysler decided to offer the engine in the Jeep Grand Cherokee, but it didn’t put the Hemi badge on the car. Jeep customers began calling Chrysler asking for the badges so they could put one on their cars. In response, Chrysler now puts the Hemi badge on the Grand Cherokee. In fact, Chrysler recently increased the size of the Hemi badge. 
What generic competitive strategy is Chrysler using in this case? What are the drivers behind its strategy?
(10 points)
Question 4.- 
In 1950, Dunkin’ Donuts was founded by Bill Rosenberg in Quincy, MA. Over the past 50 plus years, it has become one of the most recognized American brands. Dunkin’ Donuts has experienced tremendous growth. In 1970, they operated 1000 stores with sales of $300 million. By 2003, they had sales of $3 billion from 5000 stores operating globally. Dunkin’ Donuts has many strengths (quality and freshness, flavor and variety, good value, convenient locations, strong brand recognition). However, the industry now includes several powerful adversaries, including Krispy Kreme and Starbucks. Dunkin’ Donuts must fight now to maintain their competitive advantage.
a) Using the six forces model of industry attractiveness, analyze the competition 	within Dunkin’ Donuts’ industry. (10 points)
b) Within which one of the four industry structures does the donut/coffee industry fit? Explain your answer. (10 points)
Pauta
What happened? How could Monsanto’s strategy have come apart so rapidly? (10 points)
The undoing of Monsanto’s strategy began with its entry into the European market with its genetically modified soybeans. Apparently, Monsanto had failed to carefully consider two aspects in its strategy: 
a) PEST threats. Monsanto underestimated the political and social threats in the external environment. Monsanto under estimated the fears people have about genetic modifications of food products.
b) The power of buyers. Buyers quickly united in their opposition to Monsanto’s products. Buyers’ opposition soon spread throughout Europe and then back to the U.S. 
 Looking back it seems that Monsanto should have been able to detect these threats through a proper external analysis. Perhaps Monsanto’s excitement about its technology (which was supported by the stock market) blinded the company to what should have been an obvious threat. In any case, Monsanto’s experience highlights the importance of a thorough external analysis, particularly the importance of considering the threat of buyers.
(Michael Watkins, Robert Shapiro and Monsanto, HBR Case 9-801-426, Revised 2003).
Question 2 .-
e) Wal-Mart, Timex, Casio, and Hyundai are all cited as examples of firms pursuing cost leadership strategies, but these firms make substantial investments in advertising, which seems more likely to be associated with a product differentiation strategy. Are these firms really pursuing a cost leadership strategy or are they pursuing a product differentiation strategy by emphasizing their lower costs? Why do they advertise?
	 (10 points)
Yes. There is an element of both business level strategies in the actions of these companies. However, there would be little point in their advertising if they did not vigorously pursue cost leadership strategies. These firms need to generate large sales volumes to fully exploit their low per unit cost structure. Keep in mind that their advertising is not just for their intended customers. Their advertising is an important signal to competitors as well. As such, it is an important part of their cost leadership strategies
f) Firms engage in an activity called “forward pricing” when they establish, during the early stages of the learning-curve, a price for their products that is lower than their actual costs, in anticipation of lower costs later on, after significant learning has occurred. Under what conditions, if any, does forward pricing make sense? What risks, if any, do firms engaging in forward pricing face? (10 points)
Forward pricing makes sense when firms have some basis for accurate prediction of learning 	curve effects on costs. For example, if the firm has had prior experience with a similar product, 	then forward pricing can be undertaken with some confidence. It should be noted that firms 	engaging in forward pricing are signaling to would-be competitors that costs are going to fall such 	that it may not make sense to even try to compete.
	The most obvious risk firms face when forward pricing is that their estimate of future costs will be 	wrong. If actual costs come in above the estimate, the firm is in the position of either accepting 	smaller margins than expected or raising prices—neither of which is desirable. Another risk is that 	competitors may be able to achieve a lower cost in which case the focal firm would appear to have 	been charging an excessive price, which may hurt sales.
g) Will a firm that has a competitive disadvantage necessarily go out of business? How about a firm with below average accounting performance over a long period of time? How about a firm with below normal economic performance over a long period of time? (9 points)
a) No, a firm could have a sustained competitive disadvantage and remain in business. Remember that a sustained competitive disadvantage simply means the firm is generating less value than competitors. Many firms continue to operate even though they do so at a competitive disadvantage in some areasbecause they usually have some advantage in another area. If the firm had no competitive advantages at all, in time the firm would likely begin to earn below normal economic returns and may go out of business as explained in answer (c) below.
b) No, a firm could have below average accounting performance and remain in business. As long as the returns to the owners of the firms are satisfactory, the firm will remain in business, even if those returns are less than the industry average.
c) Yes, a firm that earns a below average economic return over a long period of time will eventually go out of business. The reason for this is that the firm is earning less than its cost of capital. In time, the firm would be unable to attract capital and would be forced to go out of business.
h) A firm with a highly differentiated product can increase the volume of its sales. Increased sales volumes can enable a firm to reduce its costs. High volumes with low costs can lead a firm to have very high profits, some of which the firm can use to invest in further differentiating its products. What advice would you give a firm whose competition is enjoying this product differentiation and cost leadership advantage? (10 points)
Two possibilities exist. You could try to serve a different market. Look for customers that do not have a strong preference for your competitor’s product and focus on serving them with a different base of differentiation. You could also develop a new differentiated product based on a different base of differentiation that will cause your competitor’s customers to prefer your product. You are not likely to win a cost war until you develop a strong following among some set of customers for your own differentiated product.
Question 3: 
Chrysler Reintroduces the Hemi Engine
What generic competitive strategy is Chrysler using in this case? What are the drivers behind its strategy?
(10 points)
Chrysler seems to have successfully differentiated its products by combining several bases of differentiation such as:
a) product features, 
b) links within the organization,
c) reputation, and consumer marketing
 Chrysler recognized that the full value of the product feature (Hemi engine) would not be realized without a focus on consumer marketing that played on the reputation of the product feature. 
Chrysler also realized that the value of the differentiated product could be increased by spreading the product feature and the reputation across multiple car lines (links with the organization).
Question 4.- 
a) Using the six forces model of industry attractiveness, analyze the competition 	within Dunkin’ Donuts’ industry. Which is the strongest threat? (10 points)
	Rivalry: Competitive rivalry is the strongest of the five forces. The threat from competition has increased greatly due to the market entrance of such big players as Krispy Kreme and Starbucks. This makes rivals a strong competitive force.
	Substitutes: There are numerous substitutes for donuts and coffee. Any other quick and convenient breakfast food item could be considered a substitute product, including:
· cereal bars
· pop tarts
· bagels
· yogurt
	Plus, perceived healthier options may prove a bigger threat.
Suppliers: Although not specifically discussed in the case, students should be able to 	reason that the supplier products include such products as sugar, flour, milk, coffee beans, 	etc. 	Given that these products are typically perceived as standard products, the force 	from suppliers should be fairly weak. They should be competing on price.
Buyers: The force from buyers is most likely moderate. There is some brand loyalty; 	however, buyers have many options and no switching costs.
Potential Entrants: The threat from potential entrants is also moderate. There is 	certainly brand recognition and there would be many entry barriers to entering 	the 	national or global market. However, there are few barriers for local “mom and pop” 	donut shops. 
Complementors: None. 
b) Within which one of the four industry structures does the donut/coffee industry fit? 	Explain your answer. (10 points)
The donut/coffee industry clearly fits within the mature industry category. This 	industry has been around for more than 50 years. Customers are extremely 	familiar 	with the products offered and have developed some brand attachment. As evidenced by 	Dunkin’ Donuts, the industry has definitely moved to 	International competition.
Curso: Leadership and Business Strategy , EAA 305 A
First semester 2008
Primera Prueba
Please write your name in all pages.You may answer in english or in spanish.
Question Nº 1 
Has Coor´s created value between 1985 and 2008? (20 points)
 Since this question was assigned in our last class, you may have prepared a typewritten answer previous to the prueba, in which case you may deliver it now and do not have to write an answer.
Question 2 .-
The following is a report published in Yahoo news, last week:
“Low-Cost Carrier Sky bus Airlines Shutting Down and Plans to File for Bankruptcy Protection 
COLUMBUS, Ohio (AP) -- Low-cost carrier Skybus Airlines is shutting down Saturday and plans to file for bankruptcy protection next week, becoming the latest of the nation's airlines to fall because of rising fuel costs and a slowing economy. The announcement Friday came less than a year after Skybus started up at Port Columbus International Airport, offering several $10 flights. The airline's situation worsened in recent weeks, said Skybus spokesman Bob Tenenbaum. 
Fuel prices and the worsening economy combined to be insurmountable for a new carrier, said chief executive Michael Hodge. "We deeply regret this decision, and the impact this will have on our employees and their families, our customers, our vendors and other partners, and the communities in which we have been operating," Hodge said in a statement. 
The airline makes 74 daily flights to 15 U.S. cities, Tenenbaum said. It has about 350 employees in Columbus and 100 at a second hub at Piedmont-Triad International airport in Greensboro, N.C. Employees learned of the shutdown Friday night. The final flight, taking off from Fort Lauderdale, Fla., was scheduled to touch down in Columbus just before 1 a.m. Saturday, Tenenbaum said. 
He did not know how many passengers would be affected but said the company has flights scheduled through Sept. 2. They are eligible for a full refund. 
The airline said that all flights were to be completed Friday and that it plans to file Monday for Chapter 11 bankruptcy protection. Skybus is pulling the plug less than two weeks after CEO Bill Diffenderffer resigned to pursue a book-writing career. He was succeeded by Hodge, the company's chief financial officer for the past year. 
Skybus has endured some bumps since it began flying May 22, 2007. Over two days during Christmas week, the airline canceled as many as a quarter of its flights because of problems with two of its planes. Recently, it has been dropping flights and destinations because of high fuel costs. Skybus offered at least 10 seats for $10 on every flight. The airline advertised an a la carte, pay-per-service flying experience. Checking a bag cost $12 at the ticket counter, for instance, while boarding with the first group of passengers cost $15. "Most airlines tell you you're not paying for baggage, but the fact is, you are paying for it," Tenenbaum said. "It's built into the cost." 
The announcement adds to a string of bad news for airlines, which have been hurt by a slowing economy, high fuel prices and maintenance concerns. ATA and Aloha Airlines both stopped flying this week after filing for bankruptcy protection. American, Southwest and Delta airlines have all had to cancel flights recently to address safety concerns about some of their aircraft.”
2.1 Explain the reasons for Skybus bankruptcy from the perspective of the attractiveness of the airline industry. (10 points) 
2.2) From the perspective of the competitive advantage, why did Skybus go broke?(10 points)
Question 3: 
General Motors has been loosing market share for years in the Us car industry:
3.1.- How important is for General Motors not to continue loosing market share in the US automobile business? Why? (15 points)
3.2 Considering that GM continues to be the market leader in unit sales in the US market, would you recommend a low cost strategy or a differentiation strategy in the US automobile business? Why? (15 points)
Pauta
2.1 Explain the reasons for Skybus bankruptcy from the perspective of the attractiveness of the airline industry. (10 points) 
The airline industry is tough!
Suppliers, Boeing and Airbus have a lot of negotiation power. Delivery of planes take a long time. Planes are scarce and cost a bundle. Airports charge high landing fees.
Buyers do not have much power individually, but, there is little space for differentiation. So price is the big factor in the consumers decision to fly and in which airline to do it..
New entrants. There are crazy people who enter this industry all the time. Skybus was one of them.The main barrier to entry are slots in airports, which are scarce and , hence, expensive.
Substitutes. For short haul , a lot: buses, cars, etc.
But the big problem is rivalry. There are many competitors, with different cost structures (economies of scale play a big role, since most costs are fixed, in a market in which price is the main discriminating factor for consumers. There is excess capacity during some periods of the year, and then, everybody wants to fly in other periods, like vacations.Because of this high threat of rivalry, there are frequent price wars, particularly when demand is soft, and airlines go bankrupt. One of the “victims” is Skybus, because of “a slowing economy”; it is hinting that the whole industrry suffers with a soft demand ¡because prices go down!. 
2.2) From the perspective of the competitive advantage, why did Skybus go broke? (10 points)
As was mentioned before, there is no much space for differention, so competition is based on price. In sucha a case, those companies which have a competitive disadvantage , go down and those which have cost advantages, do better. High fuel prices, the second reason given for Skybus demise, affect all competitors. However, those airlines which have a lower cost base, either because of scale or by the way they operate (Southwest), continue to have a better positioning than those which have a higher cost base.
Skybus was a small airline, operating in small markets, so, it probably had a very high cost structure relative to bigger competitors. Hence, when demand softened, pushing prices down , and fuel costs increased, they went out of business.
Question 3: 
Read the attached report from Fortune magazine and answer the following questions:
3.1.- How important is for General Motors not to continue loosing market share in the US automobile business? Why? (15 points)
Extremely important. If market share goes down, GM looses sales volume and looses scale. If scale goes down, the average cost for GM of building cars goes up, because of fixed costs, idle capacity, lower negotiation power with suppliers and buyers, etc.. If GM looses market share, it implies that competitors are gaining share! Market share is a zero sum game. If competitors gain share, because of the additional volume, they have just the opposite effects. Higher use of capacity, lower proportion of fixed costs in their average costs, higher negotiation power with suppliers and buyers, etc. In other words, competitors thrive and GM suffers. 
3.2 Is Wagoner following a low cost strategy or a differentiation strategy in the US automobile business? (15 points)
Although there are several paragraphs about cost reduction efforts in GM, under Wagoner’s leadership (i.e. reducing health care cost of retired workers) the main thrust in Wagoner’s strategy is design of attractive cars.
When Bob Lutz, GM’s chief designer, says: “The automobile is a lust object. Intellectualizing the car business is a mistake. We’ve refocused on the important ingredients of style, like proportion and stance. Where we used to shoot to be competitive, we now shoot for best in class” , he says it all.
 GM is moving away from a low cost positioning to a differentiation positioning. 
All the other issues raised in the article are meant to make GM operationally efficient, but the key strategic thrust is to sell attractive cars, a differentiation strategy. To be able to achieve this competitive advantage, now designers team up with engineers!
5
FocalFirmDemographicTrendsTechnologicalChangeCulturalTrendsEconomicClimateLegal/PoliticalConditionsSpecificInternationalEvents
PESTAnalysis
Smart PhonesPopulation GrowthChanging Image of SUV’sRisingInterestRatesChanging Policy toward Foreign firmsBan on Transgenic food
12
Sources of Cost Advantage: Drivers
1.-Economies of Scale
•average cost per unit falls as quantity produced
increases-until the minimum efficient scale is reached
•competitors may not be able to match the scale 
because of capital requirements (barrier to entry)
•international expansion may allow a firm to have
enough sales to justify investing in additional
capacity to capture economies of scale•diseconomies of scale occur when firms become too 
large and bureaucratic
b
aS
c
=
PONTIFICIA UNIVERSIDAD CATÓLICA DE CHILE
ESCUELA DE ADMINISTRACIÓN
 
PONTIFICIA UNIVERSIDAD CATÓLICA DE CHILE 
ESCUELA DE ADMINISTRACIÓN 
 
PONTIFICIA UNIVERSIDAD CATÓLICA DE CHILE 
ESCUELA DE ADMINISTRACIÓN 
Economic Structure of a Flight from Los Angeles (LAX) to New York (LAG) - 2010
US$ % of Sales
Labor95,3319%
Fuel97,8519%
Aircraft Rents & 0wnership25,675%
Non Aircraft & Ownership17,073%
Non Employee Labor32,056%
Payments to Partners & Merchants53,7311%
Interest12,252%
Other Expenses27,475%
Federal Taxes & Fees75,1615%
Landing Fees8,572%
Maintenance Supplies6,621%
Aircraft Insurance0,50%
Non Aircraft Insurance1,430%
Agents Commissions4,461%
Communications3,851%
Advertising2,741%
Utilities & Office Supplies2,270%
Food & Beverage6,151%
Airline Profit33,457%
Price LAX - LGA506,62100%
Hoja1
	Economic Structure of a Flight from	 Los Angeles (LAX) to New York 	 (LAG) - 2010
		US$	 % of Sales
	Labor	95.33	19%
	Fuel	97.85	19%
	Aircraft Rents & 0wnership	25.67	5%
	Non Aircraft & Ownership	17.07	3%
	Non Employee Labor	32.05	6%
	Payments to Partners & Merchants	53.73	11%
	Interest	12.25	2%
	Other Expenses	27.47	5%
	Federal Taxes & Fees	75.16	15%
	Landing Fees	8.57	2%
	Maintenance Supplies	6.62	1%
	Aircraft Insurance	0.5	0%
	Non Aircraft Insurance	1.43	0%
	Agents Commissions	4.46	1%
	Communications	3.85	1%
	Advertising	2.74	1%
	Utilities & Office Supplies	2.27	0%
	Food & Beverage	6.15	1%
	Airline Profit	33.45	7%
	Price LAX - LGA	506.62	100%
Hoja2
Hoja3
15
M .Koljatic
�
M.
Stock Prices
Gordon Model
P i = Cash Flow i / (r 
-
g)
r = Opportunity Cost of Capital 
g = Compounded Average Growth Rate of 
Earnings
 
PONTIFICIA UNIVERSIDAD CATÓLICA DE CHILE 
ESCUELA DE ADMINISTRACIÓN 
En busca de la Diferenciación
•
Una empresa establece una ventaja competitiva de 
diferenciación cuando los 
Atributos, Beneficios y/o 
Emociones 
asociadas al consumo del producto (o servicio) 
son percibidos por los consumidores como mejores que los de 
la competencia.
•
Estos 
Atributos, Beneficios y/o Emociones 
son lo que los 
consumidores aprecian en el producto, o que reducen el mayor 
costo de uso o transacción para el consumidor (por ejemplo, 
los restaurantes en El Bosque).
•
Estos 
Atributos, Beneficios y/o Emociones 
son los “Drivers 
de Valor”.
•
Para entender los Drivers de Valor tenemos que comprender 
quienes son los consumidores meta (segmentación) del 
producto, como usan los consumidores el producto y cuales 
son las necesidades que satisfacen.