Corporate Strategy (Strat 502)

Answers to Review Questions for Sessions 7-9

Corporate Scope
1. In 2009, private investors bought most of Skype at a valuation of $2.7b. In 2011,
Microsoft paid almost three times that amount to buy Skype from the private
investors. Provide an explanation for why Microsoft paid so much for Skype.
A possible explanation we discussed in class:
- There are synergies between Microsoft and Skype that are unique to Microsoft.
For instance, Microsoft can include Skype into Office making Office a more
appealing product. So, Microsoft is willing to pay more for acquiring Skype than
what the group of private investors paid, because Skype is worth more to
Microsoft.
2. Company A, which has a market value of $10 billion, has been considering buying
company B, which has a market value of $5 billion. The CEO of A reasons that the
new company, A+B, will have a value of $15 billion. That is, by buying B, the stock
price of A would increase by a 50%. Is the CEO reasoning correct? Explain.
The CEO has missed two items: (i) the cost of buying B and (ii) the synergies
(positive or negative) that will stem from having A and B under the same corporation.
For instance, if there are no synergies, if A buys B at $5 billion, the value of the new
corporation would still be $10 billion ($10 + $5 [value of B] $5 [cost of buying B]).
3. Should a bank outsource its Information Technology department? Provide one
argument for and one against outsourcing this department.
Many potential arguments here. A couple of examples:
Argument for outsourcing: IT is a commodity, many firms can provide the service, so
the price they can charge is lower than what it would cost for the bank to do this
themselves. Plus, it might be relatively easy for the bank to monitor the quality of the
outsourced IT (e.g. either the system works or it doesnt), which makes owning the IT
department unnecessary. A contract may be cheaper.
Argument against outsourcing: It is difficult to write a contract for IT services,
because IT is a complex system whose quality is difficult for the bank to monitor.
Moreover, IT will have many linkages with the banks other systems. The bank needs
to control the IT department to make it work well with the other areas of the bank.
Notice how these two arguments make different assumptions about whether or not IT
is easy to monitor.
Geographic Scope

4. Imagine that Buffalo Wild Wings decided to expand into Russia. Provide one
advantage and one disadvantage of the following entry modes: joint venture,
acquisition, and green field.
Examples:
Joint venture:
- (+) Having a partner that knows the local culture, regulation, consumers, etc.
- () Having to split profits with that partner.
Acquisition:
- (+) Fast to market.
- () May not be able create the right culture or provide exactly the service BWW
would like to provide.
Green field:
- (+) Being able to better control the service provided (e.g., as the employees could
be better selected or the store layouts could be chosen rather than inherited).
- () Slower to market.
5. Imagine Tesla Motors is considering opening an R&D lab in China. Which entry
mode would you recommend? Compare the pros and cons of joint venture versus
green field.
Example:
Joint venture:
- (+) Faster to market
- (+) Provide local knowledge
- (+) Government may require ties to local players.
- () May be hard to govern
- () Risk of intellectual property (IP) leakage
Green field:
- (+) May fine tune the type of employees and culture of the firm
- (+) Is less likely that IP may be stolen
- () May be slower to implement
- () May be costlier

Value Capture
1. Sketch the industry value chain of the economics textbooks industry (i.e., trees to
paper to to students).
A simple version of this value chain could be as follows:
Owners of tree farms Paper plants Authors Publishing Company
Distributors (stores, Amazon, etc.) Students
2. Use the previous sketch to predict where value is captured in this industry.
To answer this part of the question, you need to state your assumptions about where
the bottlenecks are (i.e., where there are few players) and make the point that the
bottlenecks are where the value is likely to be captured.
Example:
I assume that trees are a commodity, students are numerous and fragmented, and
authors and potential authors are numerous and mostly interchangeable. These
portions of the value chain are thus unlikely to be bottlenecks and are unlikely to
capture value.
I further assume that there are larger economies of scale in paper production,
publishing, and distribution. Therefore, there are likely to be fewer players in these
parts of the industry value chain. These players are thus more likely to be a
bottleneck, and are more likely to capture more value.
3. Propose a strategy that one player in this industry could use to become a new
bottleneck.
There are many potential answers here. Lets take authors as an example.
An aspiring textbook author could create a new discipline (e.g., relativistic finance)
and become the authority (i.e., the guru) in that discipline. Moreover, the
discipline should be very complex, so that he/she is the only recognized expert on it.
This author would become the bottleneck for all those who want to learn about this
new discipline. For the strategy to be successful, reading a book on this topic
shouldnt be enough to become an expert.