This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Fortune’s Top 10 US Firms Rank2012 1Exxon-Mobil 2Wal-Mart 3Chevron 4Conoco-Phillips 5General Motors 6General Electric 7Berkshire Hathaway 8Fannie Mae 9Ford Motor Company 10Hewlett-Packard

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Persistently Superior Profitability  What accounts for success?  Do all well-managed firms earn superior profit?  What can managers do to get superior profit?  Can managers enhance profitability by diversification?  Do all firms eventually drop back to the pack?

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill,  Wal-Mart Most profitable retailer in the world  1962: First store opens  1993 q2 – 1997: stock value dropped  1999: $165 billion in sales Responses to problems in mid 1990’s  New international super-centers  E-commerce sites  Experimented with traditional sized grocery stores in Arkansas  By 1998 the stock was performing well again The Economics of Strategy: Creating & Capturing Value

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Strategy  Strategy: Management definition Economics definition  Profitability Create Value Capture Value

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Creating Value: Transactions Costs Quantity Price in $ Q*Q* P*P* Demand Supply

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Creating Value: Transactions Costs  Consumer Borne Transactions Costs Reducing these costs allows greater profit as consumers will pay more  Producer Borne Transactions Costs Reducing these costs allows greater profit as costs are lower for the same price received from the consumer

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Creating Value Quantity Price In $ Q*Q* P*P* Consumer Surplus Producer Surplus Producer-borne transaction costs Consumer-borne transaction costs

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Transaction Cost & Creating Value  Consumer Transaction Costs Costs of search Costs of learning about product quality Costs of Negotiation  Producer Transaction Costs Costs of negotiation Attorney fees to draft sales agreements  Examples Early Wall Marts were in rural areas reducing transportation costs by opening stores closer to customers. Kraft Lunchables Terrorist Attacks and the Airline Industry

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Other Ways to Create Value  Product Quality  Pricing Complements  Pricing Substitutes

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Capturing Value  Long Run Profitability in Competitive Markets Economic Profit Accounting Profit  Firms with Market power With barriers to entry Without barriers to entry

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Capturing Value  Barriers to entry  Degree of rivalry  Threat of substitutes  Buyer and Supplier Power

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Capturing Value: What works?  Superior Factors of Production  Some advantages are hard to copy

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, All good things come to an end Rank IBMGeneral MotorsWal-MartExxon-Mobil 2AT&TExxonExxon-MobilWal-Mart 3General MotorsFord MotorChevron 4Standard Oil of NJIBMGeneral MotorsConoco-Phillips 5Eastman KodakGeneral ElectricConoco-PhillipsGeneral Motors 6Sears RoebuckMobilGeneral Electric 7TexacoAltria GroupFord Motor Berkshire Hathaway 8General ElectricChryslerCitigroupFannie Mae 9XeroxDuPontBank of AmericaFord Motor 10Gulf OilTexacoAT&THewlett-Packard

Diversification This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill,  What is it?  Costs of Diversification  Benefits of Diversification  Stuff that won’t maximize profits

Discussion Question This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill,  8-4: The Watts Brewing Company owns a valuable water rights that allow it to produce better beer than competitors. The company sells its beer at a premium and reports a large profit each year. Is this firm necessarily making economic profit?

Discussion Question This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill,  8-5: Sun Resorts has a hotel on a Caribbean Island. It recently spent money to lobby the government to build a better airport and expand air service. Why did they do this? Do you think Sun Resorts cares about how many airlines serve the island?

Discussion Question This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill,  8-6: Evaluate the following statement: “Business is war, never consort with the enemy.”

Old Midterm Question This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, The excerpt below was taken from the October 22, 2011 edition of The Economist magazine. “ The social-media sensation, which offers on-line coupons for bargains at local shops and restaurants, is planning an initial public offering later this year. Valuations as high as $20 billion were until recently bandied around, but that now seems wildly optimistic… Groupon started with a nifty idea. Its website offered a “daily deal” whereby consumers could buy a product or service very cheaply if a minimum number of people signed up. People would nag their friends to come to the same bar or shop. The merchant would get new customers. Groupon would take a cut.

....more from the midterm… This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, For merchants, this model has big advantages. They are advertised on Groupon’s phenomenally popular website. This is especially useful for new businesses that no one has heard of. Groupon helps merchants manage capacity, too. For example, a restaurant might sell vouchers that are redeemable only on Tuesdays, thus filling tables on a quiet night. Or a Pilates studio might use vouchers to manage class sizes. Once a client has paid for the voucher, the studio collects the fee even if she is hung-over and doesn’t turn up.

....more from the midterm… This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Groupon also allows merchants to charge different people different prices for the same product. A student might buy theatre tickets on Groupon for half price. A businessman with no time to shop around on-line might buy the same tickets for full price. Without Groupon, it is harder for the theatre to find out what people are willing to pay. It could charge both punters full price, in which case the student may stay at home. Or it could charge both the lower price, in which case it makes less money.” Use concepts from class to discuss the likelihood that Groupon will earn unusually high profit for a long period of time.

Follow-up for Groupon This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, Elsewhere in the same article from The Economist the authors note that: “Groupon created a new market. This is a boon to consumers, but confers no lasting “first-mover” advantage on Groupon. Its business model is unpatentable and simple to replicate, so there are already more than 20 copycats… …In short, Groupon is still the king of online discounts. But with so many pretenders around, it may be unwise to pay a premium for its shares. On October 19th the firm was reportedly considering scaling back its IPO.”

Discussion Question This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill,  8-8: One CEO justified the merger of his soft-drink company with a machine tool company in the following manner: “This is a great merger. First the products are unrelated. Thus our company’s earnings volatility is likely to decrease. Second, our management team has proven that we are better managers than the former management of the tool company.” Evaluate this rationale.

Discussion Question This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill,  8-9: Pepsi produces Fritos and Lays potato chips in addition to it basic soft-drink products. Discuss potential ways this business combination might increase value.

Discussion Question  8-8 One CEO justified the merger of his soft-drink company with a machine tool company in the following manner: “This is a great merger. First, the companies products are unrelated. Second, our companies managers have proven they are better managers than the former managers of the machine tool company…” Evaluate this rationale. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.