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Ch 6&CH 7.docx

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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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