1. The Economics of Strategy: Creating & Capturing Value
Wall Mart
Most profitable retailer in the world
1999: $165 billion in sales
1962: First store opens
1993 q2 – 1997: stock value dropped
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
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.

2. Superior Performance Beating the market over a long period
What accounts for the success of these firms?
Should all properly managed firms expect superior performance?
What actions can managers take to generate superior performance?
Can managers enhance performance 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, 2004.

3. Strategy Strategy: Profitability Management definition
Economics definition
Profitability
Create Value
Capture Value
Eli Whitney: Value Created, but not captured
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.

4. Creating Value Price In $ Supply P* Demand Q* Quantity
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.

5. Creating Value Price In $ Producer-borne transaction costs Consumer
Surplus P*
Producer Surplus
Consumer-borne transaction costs Q*
Quantity
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.

6. 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
Dell eliminates the middle man in direct web-site PC sales and splits the gain between themselves and the buyer
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, 2004.

7. Other Ways to Create Value
Product Quality
Titanium Golf Clubs
Parabolic Skis
Pricing Complements
Cut the price of the complement and increase the sales of both products
Applications
Printers and Personal Computers
Razors & Blades
Pricing Substitutes
Raise the price of a substitute
Don’t allow people to bring food into a theater
Airlines restrict the use of cell phones
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.

8. 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, 2004.

9. Capturing Value: What works?
Barriers to entry
Degree of rivalry
Number of competitors
Relative size of competitors
Threat of substitutes
Example: and fax pose serious threats to profits for Federal Express and UPS
Buyer and Supplier Power
Example: Microsoft and Intel in Personal Computers
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.

10. Capturing Value: What works?
Superior Factors of Production
Better inputs tend to cost more
Some things are hard to copy
Examples:
Flexible technology
Team production
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.

11. All good things come to an end
Rank
1970
2008 1
IBM
Wal-Mart 2
AT&T
Exxon-Mobil 3
General Motors
Chevron 4
Standard Oil of NJ 5
Eastman Kodak
Conoco-Phillips 6
Sears Roebuck
General Electric 7
Texaco
Ford Motor 8
Citigroup 9
Xerox
Bank of America 10
Gulf Oil
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.

12. Diversification Benefits Economies of Scope Promoting Complements
Example: When one input is used in several products you may get a better price when ordering it.
Promoting Complements
Example: Ford can advertise its auto-financing when advertising its cars
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.

13. Diversification Costs
With larger firms it gets increasingly difficult to get lower level managers to act in the interests of the owners.
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.

14. A faulty reason to diversify
Reducing Earnings Volatility
Goodyear Tire and Oil
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.

15. Diversification When does diversification create value?
Related Diversification
Businesses serve common markets or use common technologies
Example: Disney operates theme parks, hotels, retail shops and TV stations. All are family oriented products. This can reduce consumer transactions costs for people searching for safe products for children.
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.

16. Work Space: Intentionally Blank
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.