Answer Key Corporate Finance

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The major problem in this analysis is the definition of industry. Generally industry is a group of firms that supplies a common market. But the definition of market is unclear. We can find different levels of market segmentation and the same firm, the same product, can easily be associated to more than one market. The easiest way generally is to define a market as a group of goods that can be easily substituted one with the other.

To sum up, the five force help the a firm to focus on two questions: “what do customers want” and “what does the firm need to do to survive competition”.

There are several criticism to the Porter’s theory:

- Theoretical → the structure – behaviour – performance approach (structure of the industry determines company’s behaviour and then industry profitability) underlies a lacks of rigor

- Empirical → in the real word, the industry environment is a minor determinant of a firm’s profitability

- It doesn’t account of the complements product. If the presence of substitutes product decrease the value of the good, the presence of complements increase it (my toner is more worthy if it is the only compatible with a specific printer).

- It doesn’t account of the network externality, that we have when the number of people that use the product increase the value of the product itself.

- It cannot be applied in market characterized by Hypercompetition. Thanks to the innovation in technology, there are some market where competitive advantages still for a very low amount of time and companies have to build continuously new way to beat their competitor. This continue changing in competition makes the whole industry structure unstable and makes impossible to forecast its profitability.

- It doesn’t take full account of competitive interactions among firms, because it suppose that the strategic decision are made without taking in account the decision of ours competitor. → in order to avoid this, we can use the Game theory model, that makes possible not only to choose to compete with the competitor, but also to cooperate with him.

Moreover game theory introduce the concept of deterrence, the possibility to impose cost on the competitors for actions undesirable for us, so that they will choose what we want. In order to be effective, deterrence must be credible (if it create a bigger disadvantages for me than for the competitor, it is not). A possible way in order to make deterrence credible is the commitment: the elimination of strategic option to give a message to the competitor. (esp. burning the ship to show that we are willing to remain on the island for long time)

Problem of game theory: because it’s very rigor, it’s hard to adapt to a present situation. It is better to study the past than the present.

In order to have a more complete view of the Industry, we can recur to a more specific analysis of the competitor and of the market.

The competitor analysis is divided in two steps:

- Competitor Intelligence: is the systematic collection and analysis of information about rivals. It helps to forecast competitor’s future strategies and decisions and to understand how competitor’s behaviour could be influenced

- Competitor behaviour: is the full understanding of the value and goals of the competitors. You have to analyse:

- Competitor current strategy

- Competitor objectives

- Competitor assumptions about the industry

- Competitor resources and capabilities

The market analysis can be done in two different ways:

- Segmentation: is the process of disaggregation of an industry into specific markets. It help in order to have a more specific and a less amount of information about the market. In order to do this, we have to

- Identify the key segmentation variables: it is the basis on segmentation, the criteria that we want to use in order to segment the market.

- Construct a segmentation matrix: where we segment the market on the (two-three) variables that we choose on the step before

- Analyse segment attractiveness: we analyse if there are segments whose profitability is explained from the same forces and we merge them

- Identify the segment’s key success factors

- Select segment

- Strategic group: It segment an industry on the basis if the strategies of the member firms. A strategic group is the group of firms in an industry following the same strategy. So then we can analyse the profitability of each group and follow the strategy of the best.

Lecture 3: Resource-based View of the Firm

The RBV explain the profitability and the value of a firm on its capacity and resources. Now that market and costumers are in a continuous changing, economist think that the RBV is able to give a more realistic and long-term evaluation of a firm, because it’s bases on characteristic that go above the trend of the moment.

Generally, the grater the rate of change in a firm’s environment, the more likely it is that internal resources will provide a secure foundation for a long-term strategy.

The RBV works on the following assumptions:

- Heterogeneity among firms

- Absence of factor markets (market for some resource do not exists)

- Competitive advantages (in the absence of replication, superior performance could be persistence)

Resources are the productive assets owned by the firm. They can be:

- Tangible (machine)

- Intangible (licences)

- Human

Capability: mean the firm’s capacity to deploy resources for a desired end result. Two approach to classify capability:

- Functional analysis: identify capability within each of the firm’s functional areas

- Value chain analysis: identify a sequential chain of the main activities that the firm undertakes

The real goal anyway is not