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Study Questions for Exam 1 1. Generally, which firms captured more value: aluminum producers or Coke and Pepsi? Explain your answer by analyzing the competitive forces in the concentrate industry. In each industry, which of the competitive forces seem to be the most important in determining average profitability? Coke and Pepsi captured more value – much higher profit margins. Coke and Pepsi managed to avoid destructive price competition. Huge investments in differentiation which reduce the incentive to cut price. Moreover, only two dominant players further reduces incentive for either to cut price. Facilitated by huge entry barriers as a result of the brand loyalty, and the sunk costs in advertising and promotion that would have to be incurred by a new entrant. Suppliers provided commodity raw materials, and buyers (bottlers) had little power because of high excess capacity. In both industries, rivalry among incumbent firms is probably most important. In aluminum it’s very high due to absence of differentiation and high number of firms with excess capacity. In concentrate rivalry is low because of differentiation and two dominant firms. 2. a. How would you characterize the business-level strategy used by Coke and Pepsi? Would you say that it is similar or different to that used by aluminum smelters. Explain. b. What are two different ways in which Coke might capture value from it’s business-level strategy? Which does Coke seem to pursue? Relate your answer to the nature of demand in the cola industry. c. Would you say that Coke and Pepsi have a competitive advantage? Explain. d. Do any firms appear to have competitive advantage in the aluminum industry? Explain. 3. Briefly explain how network externalities can create barriers to imitation of a firm’s competitive advantage? Give an example where you would expect that network effects would create a barrier to imitation, and explain how it would create a barrier to imitation. 4. In defending his company against allegations of anticompetitive practices, Bill Gates claimed that if someone developed an operating system for personal computers that was superior to MS Windows, it would quickly become the market leader. Do you agree? To answer this question, consider the following: If you developed Orange, a new operating system that was easier to use than Windows, and could be produced for the same cost, what factors would make it difficult for you to steal market share from Windows?
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This test prep was uploaded on 02/20/2009 for the course AEM 4240 taught by Professor Blalock,g. during the Spring '07 term at Cornell.

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