EXAM 2. The exam is open book and open notes. Electronics are not allowed during the exam.

Transcription

1 MISHARI ALNAHEDH STRATEGIC MANAGEMENT MKT 450 Section 56 Fall 2017 EXAM 2 General Instructions You have 120 minutes to complete the exam. The exam is open book and open notes. Electronics are not allowed during the exam. You have to answer all questions. Keep answers brief and to the point. Long answers are not necessary if your argument is clear. Please write clearly- no points will be given for illegible answers. There are a total of 20 points allocated to all questions. Partial credits will be awarded for partially correct or incomplete answers. State clearly your assumptions when you derive a result. You must always show your thinking to get full credit. You MUST use a PEN. You may not use a pencil. Good Luck! I pledge my honor that I have not violated the Kuwait University Policy on Cheating and Plagiarism during this examination, that the answers on this examination represent my work solely, and that I have not provided nor received any help while taking the exam: أحعهذ بأوي لم أخالف مادة الغش في الئحت وظام المقزراث لجامعت الكىيج أثىاء حأديت هذا االخخبار وأحعهذ بأوي لم أغش او أشزع بالغش وأن اإلجاباث في هذا االخخبار حمثل جهذي الشخصي فقط وأوي لم أساعذ أي طالب آخز أو اسخخذم أي مساعذة مه اي شخص آخز أثىاء حأديت االخخبار : Print Name: SUGGESTED_SOLUTIONS KUID:

2 Part1. Short cases questions. Carefully read the information provided below before starting to answer the questions. 1. In 2006, Nintendo released its new seventh-generation console Nintendo Wii. Read the following excerpt from a USA Today article before answering the questions. Nintendo hopes Wii spells wiinner From USA Today - August 15, 2006 The Wii (pronounced wee) sports an innovative controller: To hit a tennis ball, you swing it like a racket; to drive an SUV over treacherous terrain, you twist it like a steering wheel; to shoot a duck, you point it like a pistol. Getting consumers to try it and jump-start Nintendo's (NTDOY) ambitious plan to trump Microsoft's (MSFT) Xbox 360 and Sony's (SNE) PlayStation 3 falls to Reginald Fils-Aime, 45, Nintendo of America's new president and chief operating officer.[ ] Q: What made Nintendo try to do something dramatically different with the Wii? A: Our focus is interactive game play, a whole new way to play, that puts fun back into this business. It allows everybody to pick up and play and isn't focused on the core gamer. [ ] Q: The Wii seems to emphasize the controller, not heavy attention on graphics. Is that by design? A: That is exactly by design. Our visuals for Wii will look fantastic, but in the end, prettier pictures will not bring new gamers and casual gamers into this industry. It has to be about the ability to pick up a controller, not be intimidated, and have fun immediately. The trick is being able to do that, not only with the new casual gamer, but do it in a way that the core gamer gets excited as well. [ ] Q: Sounds like you're more focused on new customers and not necessarily taking share from the other guys. A: The interesting thing is if you do expand the market, you do both. You grow the category, but you'll also dramatically increase your market share. As an example, Nintendo DS in Japan outsells all of our competitors by a factor of five to one. We are so far in advance of our handheld competitors that they're not even on the map. That's all based on a market expansion strategy. And that's what we're looking to do with home consoles. a) Assume that Sony decided to buy a game publisher company that develops games for Sony PlayStation. (i) The acquisition decision is an example of: [circle only one] (1 points) Imitation Related Diversification Invention Unrelated Diversification Innovation Forward Vertical Integration Backward Vertical Integration Horizontal Growth (ii) Explain how you reached your answer in part (a-i) above. (2 points) By acquiring a game publisher company, Sony can create economics of scope through sharing resources and capabilities as well as reducing costs by coordinating launch timing of games. 2

3 b) In 2006, the videogame consoles market is dominated by Sony PlayStation. Explain how Nintendo s development of Nintendo Wii helps Nintendo gain market leadership in the highly competitive consoles market. Provide details and use a graph to illustrate your answer. (3 points) The network effect is present in videogame consoles industry since the demand depends on the number of other users of the console and the number of complements (i.e. videogames) available for the console. By introducing Nintendo Wii, Nintendo is improving the quality of its console and the demand for its console shifts up, yielding a smaller critical mass Q 1. c) Microsoft, a multinational technology company best known for its operating system Microsoft Windows, decided in 2001 to enter the video games industry by introducing the gaming console Xbox. Justify Microsoft s decision to use internal development as a new market entry mode, as opposed to acquisition or joint venture? Explain your answer carefully with details. (3 points) Internal development allows Microsoft to develop internal capabilities in the video games industry. Compared to other forms of market entry mode, internal development is generally less costly and not prone to post acquisition integration challenges. 3

4 2. On June 25, 2012, Microsoft purchased Yammer, a social network service for businesses, for $1.2 billion in cash. Yammer allows companies to create private, Facebook-style social networks where employees can chat and collaborate. According to the New York Times, Microsoft planned to fold Yammer into a division responsible for selling Office, its lucrative suite of business applications, which is facing threats from cheaper online options. We said, Look, we won t go shopping, but give us a fair price, Yammer board member George Zachary told the Times. The software giant did more than that. During its latest financial round, Yammer was appraised at a market value of $600 million. Microsoft paid twice as much. Microsoft first approached Yammer in early 2012 and submitted its opening acquisition bid in May. a) Explain how Microsoft, the buyer of Yammer, could be a victim of the winner s curse. (2 points) Microsoft is the most optimistic bidder and has likely over-estimated the true value of Yammer. There are many bidders for Yammer and the discounted value of future cash flows of Yammer will be impounded in the price the potential acquirers are willing to pay. Thus, any acquirer in an efficient market is expected to make only a competitive rate of return on investing in Yammer. Because in an efficient market all bidders have the same information about Yammer (i.e. symmetric information), the Microsoft, the auction winner, is over optimistic and has over paid for Yammer. b) Explain how it is possible that Microsoft s acquisition of Yammer was not a case of winner s curse. Provide details to receive full points. (3 points) Two cases can justify why Microsoft won the bidding for Yammer without overpaying for it, both eliminating the competitive bidding premise implicit in the efficient market hypothesis : 1) The possibility of information asymmetry in the auction. Microsoft could have valuable information about Yammer that other bidders do not have, resulting in Microsoft knowing the true value of Yammer. 2) Yammer could be worth more to Microsoft than to other bidders. It is possible that Microsoft can create distractive synergies between its current activities and Yammer, once acquired. According to the case, Microsoft planned to fold Yammer into a division responsible for selling Office, its lucrative suite of business applications, which is facing threats from cheaper online options. Thus, combing Yammer with Office could generate more value than if Yammer and Office operate separately. 4

5 c) How can transaction cost economics justify the decision of Microsoft to acquire Yammer? Explain your answer with details to receive points. (2 points) It is likely that the benefits of vertical integration are larger than the costs of vertical integration. In other words, the transaction costs are higher than administrative costs of managing the social network services internally for Microsoft. For Microsoft, monitoring costs and contract drawing costs are larger than costs of building distinctive capabilities and organizing within Microsoft for optimal scale of operation. The main benefits from embedding Yammer into Microsoft come from technical economies from integrating social network processes with Microsoft s other processes as well as the ability to achieve superior coordination internally compared to market contracts. These benefits exceed the costs associated with vertical integration. 3. (i) Why is the online social networks industry (e.g. Facebook) a winner-take-all industry? (ii) Compare your answer to why the computer operating systems (e.g. M.S. Windows) industry is a winner-take-all industry. (Hint: the reasons for the two industries are not exactly the same) (4 points) In both the online social network and the computer operation system industries, the demand is dictated by network externalities. The network externalities that cause customers to converge to a single platform (and hence a single market player) differ between the two industries: Online social networks: customer-customer externalities, where the user linkages between users is important because the value of the social network comes from the social interactions online. There are also network externalities relating to social conformity. Computer operating systems: hardware-software externalities, where the availability of complementary products leads hardware and software to co-specialize. High switching costs also forces users to adopt the most commonly used operating system. 5

6 BONUS QUESTION 1: What are the TWO most interesting topics to you in this course? (1 point) Industry analysis Strategy and finance (lecture 1) Corporate governance and agency theory Competitive strategy and advantage Technology and innovation Vertical integration and transaction costs Diversification and growth strategies BONUS QUESTION 2: When was Kuwait University s College of Business Administration first awarded the international AACSB accreditation? (1 point)