Ch 6:
1. Even though many aerospace manufacturing firms are very profitable, there are
very few upcoming firms. Explain the reason using Porter’s five-force model.
Answer: According to Porter’s five-force model, the threat of potential entrants is
influenced by both the degree to which the industry is likely to attract new entrants
(i.e., is it profitable, growing, or otherwise alluring?) and the height of entry barriers.
Entry barriers can include such factors as large start-up costs, brand loyalty,
difficulty in gaining access to suppliers or distributors, government regulation,
threat of retaliation by existing competitors, and many others. In the aerospace
manufacturing industry, this threat is relatively low because of the entry barriers.
The cost of starting an aerospace company is high and the existing companies are
well-established. These companies are large, have the contacts, personnel, and skills
necessary to meet the market demand, making it almost impossible for a new
company to compete with them.
2. Recently, three cell phone companies announced the addition of a nationwide
“walkie-talkie” service to supplement their regular cell phone service. Will this be a
sustainable competitive advantage? Justify your answer.
Answer: This will most likely not be a sustainable competitive advantage. To be a
potential source of sustainable competitive advantage, resources must be rare,
valuable, durable, and inimitable. Since three companies are offering this service it
is obvious that this resource can be imitated and while it may be somewhat rare
initially, it will most likely become commonplace. This does not mean that the cell
phone companies should not offer this service, however. To do so would only make
them fall behind the competition. Students’ answers may vary.
3. What are core competencies?
Answer: A company’s core competencies are typically considered to be those that
differentiate it strategically. A core competency is more than just a core technology.
A core competency arises from a firm’s ability to combine and harmonize multiple
primary abilities in which the firm excels into a few key building blocks of
specialized expertise.
4. Explain the advantages and disadvantages of rewarding and promoting
development of the core competency.
Answer: By rewarding and promoting the development of your core competencies
you can really excel at it and continue to be successful in your industry. After all, the
core competence gives you an advantage over your competition and you should
leverage that as far as possible. By viewing the business as a portfolio of core
competencies, managers are better able to focus on value creation and meaningful
new business development, rather than cost cutting or opportunistic expansion.
The disadvantage is that the organizational culture may reward employees who are
most closely connected to core competencies with higher status and better access to
other organizational resources. While these systems and norms can prove beneficial
in reinforcing and leveraging the firm’s existing core competencies, they can also
inhibit the development of new core competencies. Firms that have well-developed
knowledge sets along a particular trajectory may find it very hard to assimilate or
utilize knowledge that appears unrelated to that trajectory, potentially limiting the
firm’s flexibility. Students’ answers may vary.
5. What is the danger of not having a strategic intent? In your answer, assume your
company operates a hospital in a city with a population of 30,000 people, located
about 50 miles away from a large city.
Answer: Without a strategic intent, the hospital will fail to recognize future market
needs and will only try to maintain its current market position. The hospital can
easily become focused on markets it has served in the past due to a lack of forwardlooking orientation. Most likely, hospitals from the larger city will try to become
more regional in nature by opening satellite centers in the county where the local
hospital is located. They will also adopt the latest medical technology. Local
physicians may start sending patients to the other, larger hospitals as the hospital
will not be able to provide the best medical treatment to its patients. Employees will
complain about having out of date technology and of losing patients to larger
hospitals. This lower morale will adversely affect turnover. The local community
will probably also become disgruntled. Students’ answers may vary.
CH 7 :
1. Why do technology start-ups face a much higher cost of capital than larger
competitors? Discuss the sources from which new technology start-ups can obtain
external financing.
Answer: While large firms can fund innovation projects internally, new technology
start-ups must often obtain external financing. This can sometimes be daunting.
Because technology start-ups often have both an unproven technology and an
unproven business
concept (and sometimes an unproven management team), they typically face a
much higher cost of capital than larger competitors, and their options for obtaining
capital can be very limited.
In the first few stages of start-up and growth, entrepreneurs may have to turn to
friends, family, and personal debt. Start-ups might also be able to obtain some initial
funding through government agencies. If the idea and the management team seem
promising enough, the entrepreneur can tap “angel investors” and venture
capitalists as sources of both funds and mentoring. Angel investors are private
investors who fund projects without utilizing a venture capital limited partnership
structure. For projects that require more than $1 million, entrepreneurs often turn
to venture capital, either from independent venture capital firms or corporate
venture capital sources. The support of the venture capitalist provides a number of
valuable benefits including credibility among other investors (and thus better
access to capital) and mentoring.
2. What is the internal rate of return of a project? How is it calculated? What are the
drawbacks of using this method?
Answer: The internal rate of return (IRR) of a project is the discount rate that makes
the net present value of the investment zero. Managers can compare this rate of
return to their required return to decide if the investment should be made.
Calculating the IRR of a project typically must be done by trial and error,
substituting progressively higher interest rates into the net present value (NPV)
equation until the NPV is driven down to zero. Calculators and computers can
perform this trial and error. This measure should be used cautiously, however; if
cash flows arrive in varying amounts per period, there can be multiple rates of
return, and typical calculators or computer programs will often simply report the
first IRR that is found.
3. Explain how the real options method using stock options. Are there any
drawbacks to this method?
Answer: To understand real options, it is first useful to consider the financial model
upon which they are based—stock options. In “real options,” the assets underlying
the value of the option are nonfinancial resources. An investor who makes an initial
investment in basic R&D or in breakthrough technologies is, it is argued, buying a
real call option to implement that technology later should it prove to be valuable.
With respect to research and development:
The cost of the R&D program can be considered the price of a call option.
The cost of future investment required to capitalize on the R&D program (such as
the cost of commercializing a new technology that is developed) can be considered
the exercise price.
The returns to the R&D investment are analogous to the value of a stock purchased
with a call option.
One drawback is the fact that technology investment scenarios often do not conform
to the same capital market assumptions upon which the approach is based.
Furthermore, while the value of a stock is independent of the call holder’s behavior
(that is, the call holder can simply wait and observe whether the value of the stock
rises or falls), the value of an R&D investment is not independent of the investor’s
behavior.
4. Dayton Regional Medical Center has decided to build a new wing for its outpatient
services. Dayton wants to know which services are important to its patients in this
new wing. Do they prefer large waiting rooms for family members or small rooms
adjacent to recovery rooms? Do they prefer patient advocates to keep them
informed or would nurses be better? What technique would be appropriate to come
up with weights and tradeoffs for these types of services? Explain why you consider
the technique to be most appropriate.
Answer: A conjoint analysis technique would be the best choice for this analysis.
Conjoint analysis can estimate the specific value of features of the outpatient center.
As a part of the analysis, pricing for these services can also be determined. Multiple
regression can be used to assess the degree to which each service influences the
overall rating, resulting in the assignment of specific weights to individual criteria
for different configurations of the outpatient center. Although the Medical Center
cannot please everyone, it can come up with the “best” configuration for its patient
base.
5. General Sys Inc. has gathered data to evaluate the attractiveness of a potential
project. It knows the cash flows expected under different scenarios. It has conducted
a focus group that ranks various product attributes, and it has the ranking of various
marketing techniques provided by a consulting company. What method should
General Sys use to evaluate this project? Why is this method the best one to use?
Answer: General Sys should use data envelopment analysis (DEA) to conduct its
evaluation. This method allows analysis of multiple criteria that have different kinds
of measurement units. In this case, measurement units include dollars (cash flows)
and rankings (focus group and consulting company). DEA uses linear programming
to combine these different measures to create a hypothetical efficiency frontier that
represents the best performance on each measure. These values can then be used to
compare this project with other projects.
Ch 6:
1. Even though many aerospace manufacturing firms are very profitable, there are
very few upcoming firms. Explain the reason using Porter’s five-force model.
Answer: According to Porter’s five-force model, the threat of potential entrants is
influenced by both the degree to which the industry is likely to attract new entrants
(i.e., is it profitable, growing, or otherwise alluring?) and the height of entry barriers.
Entry barriers can include such factors as large start-up costs, brand loyalty,
difficulty in gaining access to suppliers or distributors, government regulation,
threat of retaliation by existing competitors, and many others. In the aerospace
manufacturing industry, this threat is relatively low because of the entry barriers.
The cost of starting an aerospace company is high and the existing companies are
well-established. These companies are large, have the contacts, personnel, and skills
necessary to meet the market demand, making it almost impossible for a new
company to compete with them.
2. Recently, three cell phone companies announced the addition of a nationwide
“walkie-talkie” service to supplement their regular cell phone service. Will this be a
sustainable competitive advantage? Justify your answer.
Answer: This will most likely not be a sustainable competitive advantage. To be a
potential source of sustainable competitive advantage, resources must be rare,
valuable, durable, and inimitable. Since three companies are offering this service it
is obvious that this resource can be imitated and while it may be somewhat rare
initially, it will most likely become commonplace. This does not mean that the cell
phone companies should not offer this service, however. To do so would only make
them fall behind the competition. Students’ answers may vary.
3. What are core competencies?
Answer: A company’s core competencies are typically considered to be those that
differentiate it strategically. A core competency is more than just a core technology.
A core competency arises from a firm’s ability to combine and harmonize multiple
primary abilities in which the firm excels into a few key building blocks of
specialized expertise.
4. Explain the advantages and disadvantages of rewarding and promoting
development of the core competency.
Answer: By rewarding and promoting the development of your core competencies
you can really excel at it and continue to be successful in your industry. After all, the
core competence gives you an advantage over your competition and you should
leverage that as far as possible. By viewing the business as a portfolio of core
competencies, managers are better able to focus on value creation and meaningful
new business development, rather than cost cutting or opportunistic expansion.
The disadvantage is that the organizational culture may reward employees who are
most closely connected to core competencies with higher status and better access to
other organizational resources. While these systems and norms can prove beneficial
in reinforcing and leveraging the firm’s existing core competencies, they can also
inhibit the development of new core competencies. Firms that have well-developed
knowledge sets along a particular trajectory may find it very hard to assimilate or
utilize knowledge that appears unrelated to that trajectory, potentially limiting the
firm’s flexibility. Students’ answers may vary.
5. What is the danger of not having a strategic intent? In your answer, assume your
company operates a hospital in a city with a population of 30,000 people, located
about 50 miles away from a large city.
Answer: Without a strategic intent, the hospital will fail to recognize future market
needs and will only try to maintain its current market position. The hospital can
easily become focused on markets it has served in the past due to a lack of forwardlooking orientation. Most likely, hospitals from the larger city will try to become
more regional in nature by opening satellite centers in the county where the local
hospital is located. They will also adopt the latest medical technology. Local
physicians may start sending patients to the other, larger hospitals as the hospital
will not be able to provide the best medical treatment to its patients. Employees will
complain about having out of date technology and of losing patients to larger
hospitals. This lower morale will adversely affect turnover. The local community
will probably also become disgruntled. Students’ answers may vary.
CH 7 :
1. Why do technology start-ups face a much higher cost of capital than larger
competitors? Discuss the sources from which new technology start-ups can obtain
external financing.
Answer: While large firms can fund innovation projects internally, new technology
start-ups must often obtain external financing. This can sometimes be daunting.
Because technology start-ups often have both an unproven technology and an
unproven business
concept (and sometimes an unproven management team), they typically face a
much higher cost of capital than larger competitors, and their options for obtaining
capital can be very limited.
In the first few stages of start-up and growth, entrepreneurs may have to turn to
friends, family, and personal debt. Start-ups might also be able to obtain some initial
funding through government agencies. If the idea and the management team seem
promising enough, the entrepreneur can tap “angel investors” and venture
capitalists as sources of both funds and mentoring. Angel investors are private
investors who fund projects without utilizing a venture capital limited partnership
structure. For projects that require more than $1 million, entrepreneurs often turn
to venture capital, either from independent venture capital firms or corporate
venture capital sources. The support of the venture capitalist provides a number of
valuable benefits including credibility among other investors (and thus better
access to capital) and mentoring.
2. What is the internal rate of return of a project? How is it calculated? What are the
drawbacks of using this method?
Answer: The internal rate of return (IRR) of a project is the discount rate that makes
the net present value of the investment zero. Managers can compare this rate of
return to their required return to decide if the investment should be made.
Calculating the IRR of a project typically must be done by trial and error,
substituting progressively higher interest rates into the net present value (NPV)
equation until the NPV is driven down to zero. Calculators and computers can
perform this trial and error. This measure should be used cautiously, however; if
cash flows arrive in varying amounts per period, there can be multiple rates of
return, and typical calculators or computer programs will often simply report the
first IRR that is found.
3. Explain how the real options method using stock options. Are there any
drawbacks to this method?
Answer: To understand real options, it is first useful to consider the financial model
upon which they are based—stock options. In “real options,” the assets underlying
the value of the option are nonfinancial resources. An investor who makes an initial
investment in basic R&D or in breakthrough technologies is, it is argued, buying a
real call option to implement that technology later should it prove to be valuable.
With respect to research and development:
The cost of the R&D program can be considered the price of a call option.
The cost of future investment required to capitalize on the R&D program (such as
the cost of commercializing a new technology that is developed) can be considered
the exercise price.
The returns to the R&D investment are analogous to the value of a stock purchased
with a call option.
One drawback is the fact that technology investment scenarios often do not conform
to the same capital market assumptions upon which the approach is based.
Furthermore, while the value of a stock is independent of the call holder’s behavior
(that is, the call holder can simply wait and observe whether the value of the stock
rises or falls), the value of an R&D investment is not independent of the investor’s
behavior.
4. Dayton Regional Medical Center has decided to build a new wing for its outpatient
services. Dayton wants to know which services are important to its patients in this
new wing. Do they prefer large waiting rooms for family members or small rooms
adjacent to recovery rooms? Do they prefer patient advocates to keep them
informed or would nurses be better? What technique would be appropriate to come
up with weights and tradeoffs for these types of services? Explain why you consider
the technique to be most appropriate.
Answer: A conjoint analysis technique would be the best choice for this analysis.
Conjoint analysis can estimate the specific value of features of the outpatient center.
As a part of the analysis, pricing for these services can also be determined. Multiple
regression can be used to assess the degree to which each service influences the
overall rating, resulting in the assignment of specific weights to individual criteria
for different configurations of the outpatient center. Although the Medical Center
cannot please everyone, it can come up with the “best” configuration for its patient
base.
5. General Sys Inc. has gathered data to evaluate the attractiveness of a potential
project. It knows the cash flows expected under different scenarios. It has conducted
a focus group that ranks various product attributes, and it has the ranking of various
marketing techniques provided by a consulting company. What method should
General Sys use to evaluate this project? Why is this method the best one to use?
Answer: General Sys should use data envelopment analysis (DEA) to conduct its
evaluation. This method allows analysis of multiple criteria that have different kinds
of measurement units. In this case, measurement units include dollars (cash flows)
and rankings (focus group and consulting company). DEA uses linear programming
to combine these different measures to create a hypothetical efficiency frontier that
represents the best performance on each measure. These values can then be used to
compare this project with other projects.
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