BA 500 STRAT: The Micro-Economics Foundations of Competition and Strategy MBA. Fall 2014

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1 1 BA 500 STRAT: The Micro-Economics Foundations of Competition and Strategy MBA Fall 2014 Professor: Charles W.L.Hill Cell: Office Hours: Tuesday and Thursday 1:00pm-3:00pm Office 538 Paccar Hall TA: Kira Thorien Cell: Office Hours: Monday 11:30am-1:00pm, Tuesday 3:30pm-5:00pm Location: Study Room #1 Foster Business Library. Required Reading Material. 1. C.W.L. Hill, G.R. Jones and M.A.Shilling. Strategic Management Theory, South Western, Cengage (11 th edition), N. Gregory Mankiw, Principles of Microeconomics, South Western, Cengage (6 th edition), HBSP course materials at Course Subject and Objectives This course is microeconomics based strategy course. The course is concerned with understanding the nature of the competitive process and the source of firm level competitive advantage. The focus is upon the economics of market competition, and the strategies that firms can adopt to gain a competitive advantage. The course explores the fundamental micro-economic principles of competition and applies these principles to the study of competitive advantage and strategy. The objectives of the course are as follows: 1. To increase your understanding of the economics of competition. 2. To enhance your ability to analyze competitive dynamics and draw out the implications for individual firms. 3. To develop an appreciation for the different strategies that can be pursued in different competitive circumstances in order to gain a competitive advantage.

2 2 Teaching Method A combination of required readings, lectures, and in-class case analyses are used to attain these objectives. A list of discussion questions for each case is included in this syllabus. Please read each case thoroughly prior to class using the discussion questions to guide your thinking. Grading Grades are determined on the basis of four components: 1. Microeconomic homework assignments (20% of total grade). There are five assignments. You will be grade on one question per assignment, picked at random. 2. An exam that focuses upon your understanding of micro-economic principles and how they apply to competitive strategy (30% of total grade). This will be given on Friday December 5 th, 2-5pm. 3. A group project that focuses upon the application of micro-economic principles to analyzing industry structure and competitive strategy (30% of total grade). This will be due December 4th. 4. Contribution to in-class discussions, particularly of case material (20% of total grade). Course Schedule Session 1, September 30 th : Course Overview Reading: Hill, Jones & Shilling, Chapter 1 Session 2, October 2 nd : Cases Analysis (1) The Evolution of the Small Package Express Industry. (2) Airborne Express 1. Despite rapid volume growth, the small package express industry was characterized by low profitability during the 1980s. Why? 2. Why did competitive intensity moderate and prices rise in the industry during ? 3. What was Airborne Express strategy during the 1980s and 1990s? Did this strategy make sense? 4. What was the company trying to do by expanding its logistics activities from the mid 1990s onwards? 5. In the 2000s this industry has generally been profitable for the two main incumbents, FedEx and UPS. Why? 6. Was selling out to DHL the logical thing to do for Airborne? 7. Why did DHL fail to gain share in the U.S. market after the Airborne acquisition?

3 3 Session 3, October 7 th : The Micro-Economics of Supply, Demand and Elasticity Reading: Mankiw, Chapter 4, 5 and 6. Session 4, October 8 th : The Micro-Economics of Supply, Demand and Elasticity (continued) Reading: Mankiw, Chapter 4, 5 and 6. Session 5, October 14 th : Case -Toyota Corporation 1. Compare and contrast Toyota s manufacturing system with a conventional mass production system. What are the advantages of Toyota s system? What are the strategic implications? 2. Describe the difference between the way supplier relations have historically been managed at Toyota and at U.S. auto companies? What are the consequences of these differences? What are the strategic implications? 3. What drove the evolution of Toyota s production system? 4. Can Toyota replicate its production system in overseas operations? 5. What is the basis of Toyota s competitive advantage? Can it be imitated? Session 6, October 16 th : Theory of Production and Costs Reading: Mankiw, Chapter 13 Session 7, October 21 st : Case - Zoots: The Cleaner Cleaner 1. How would you characterize the economic structure of the dry cleaning industry? Do you think the average player in this industry earns anything other than normal economic profits? 2. Describe and evaluate the business model for Zoots. How does Zoots intend to earn a rate of return that exceeds its cost of capital? What are the strengths of this business model? What are the weaknesses and flaws in the model? 3. How would you characterize Krasnow s approach to identifying a business opportunity? Can you see a drawback with this approach? 4. Rethink the strategy pursued by Zoots. Might the company have done things differently?

4 4 Session 8, October 23 rd : Competition in Competitive Markets Reading: Mankiw, Chapter 14. Session 9, October 28 th : Case - Coca-Cola versus Pepsi-Cola 1. The soft drink industry evolved with a franchised bottler system. For most of the industry s history the concentrate producers nurtured and preserved this system, Why? 2. During the 1980s the both Coke and Pepsi began to acquire bottlers. Why? 3. Why did Coca Cola dominate the soft drink industry by the end of the Second World War? 4. How was Pepsi able to come back from near bankruptcy and gain share at the expense of Coke from the 1950s through to 1975? 5. During the 1950s-1970s, being a concentrate producer yielded very high returns. Why was this the case? 6. How did the 1977 national launch of the Pepsi challenge change the nature of competition in the industry? 7. During the 1990s Coca Cola was gained market share back from Pepsi, and was significantly more profitable. Why? 8. What are the threats facing Coke and Pepsi in the 21sr century? How are they dealing with these? Session 10, October 30 th : Competition with Market Power Monopoly Reading: Mankiw, Chapter 15 Session 11, November 4 th : Case Internet Search and the Growth of Google 1. Why has the pay-per-click search business grown so rapidly? 2. Analyze the competitive structure of the market for search-based advertising. What are the implications of this structure for the long run profitability of players in the market? 3. Why was it entrepreneurial startups, as opposed to established enterprises, that pioneered the paid search market? 4. What explains Google s success in the paid search marketplace? How sustainable is its competitive advantage? 5. Does the pay-per-click business model pioneered by GoTo.com and Google constitute a paradigm shift? How? What are the implications for other enterprises?

5 5 6. What is Google trying to do strategically? How should competitors like Microsoft respond? Session 12, November 6 th : Competition with Market Power Oligopoly Reading: Mankiw, Chapter 17. Session 13, November 13 th : Strategic Industry Analysis (I) Reading: Hill, Jones & Shilling, Chapter 2 Session 14, November 17 th : Case - The Home Video Game Industry 1. Why was Atari so successful? What was the root cause of the Atari-era bust? 2. How did Nintendo successfully recreate the home video game business following the Atari-era boom and bust? 3. How was Nintendo able to capture value from the home video game business? 4. How was Sega able gain market share from Nintendo? 5. Evaluate the competitive strategy of 3DO? What were the strengths of this strategy? What were the weaknesses? 6. Why did Microsoft enter this business with Xbox? How successful have they been? Session 15, November 20 th : Strategic Industry Analysis (II) Reading: Hill, Jones & Shilling, Chapter 2 Session 16, November 25 th : Case Wal*Mart Stores 1. What are the sources of Wal-Mart s competitive advantage? Pay particular attention to location, functional and organization factors? 2. What role did Sam Walton play in building Wal-Mart s competitive advantage? 3. Can Wal-Mart s competitive advantage be imitated? 4. Can Wal-Mart continue to grow its revenues and profits at historic rates? What strategies does it after pursue to make this happen? 5. Do you think that Wal-Mart can replicate its domestic success in foreign countries? What might stand in the way of success overseas?

6 6 Session 17, December 2 nd : Business Level Strategy (I) Reading: Hill, Jones & Shilling: 3, 4, 5, 6 and 7 Session 18, December 4 th :Business Level Strategy (II) Reading: Hill & Jones, 3, 4, 5, 6 and 7