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.

Fortune’s Top 10 US FirmsRank 2012

1 Exxon-Mobil

2 Wal-Mart

3 Chevron

4 Conoco-Phillips

5 General Motors

6 General Electric

7 Berkshire Hathaway

8 Fannie Mae

9 Ford Motor Company

10 Hewlett-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, 2004.

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, 2004.

Wall 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, 2004.

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, 2004.

Creating Value: Transactions Costs

Quantity

Pricein $

Q*

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, 2004.

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, 2004.

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.

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, 2004.

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, 2004.

All good things come to an end

Rank 1970 1990 2008 2012

1 IBM General Motors Wal-Mart Exxon-Mobil

2 AT&T Exxon Exxon-Mobil Wal-Mart

3 General Motors Ford Motor Chevron Chevron

4 Standard Oil of NJ IBM General Motors Conoco-Phillips

5 Eastman Kodak General Electric Conoco-Phillips General Motors

6 Sears Roebuck Mobil General Electric General Electric

7 Texaco Altria Group Ford MotorBerkshire Hathaway

8 General Electric Chrysler Citigroup Fannie Mae

9 Xerox DuPont Bank of America Ford Motor

10 Gulf Oil Texaco AT&T Hewlett-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, 2004.

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, 2004.

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, 2004.

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, 2004.

8-6: Evaluate the following statement: “Business is war, never consort with the enemy.”

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, 2004.

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, 2004.

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 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 that Sun Resorts cares about how many airlines serve the island?

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.