Starbucks: BSBUX-PSBUX>BDinner-PDinner; Competitive advantage: 1. Returns from unique resources and capabilities (operational capabilities, Schultz’s leadership) 2. Market power due to first mover advantage (locations, brand, and reputation for consistency) Oligopolies: markets that are dominated by a small number of firms, strategic interdependence (firm A’s best decision depends on what firm B does) Nash equilibrium: every player strategy is a best response to everyone else’s Sequential games: look ahead and reason back Market with identical (homogeneous) products: customer care only about price Product differentiation: 1. Horizontal: different varieties 2. Vertical (quality): different WTP Differentiation relaxes price competition: stores two blocks apart, price changes lead to smaller changes in demand Five forces: Rivalry, entrants, buyer, supplier, substitutes (a snapshot, not long-run) Rivalry: 1. Price competition 2. Fixed costs => pressure to gain market share Supplier: input critical, difficult to substitute, small share of cost, little rivalry, forward-integrate Buyer: 1. large share of sales, easily substitute, more rivalry in buyer, backward-integrate Entry: average profits no high if easy; barriers: 1. hard to imitation 2. First mover advantage Industry: highly concentrated, oligopolies, fragmented (restaurants), a bit of everything (beer) Market size: the level of demand limits the number of firms, growing market attracts entry Commercial aircraft: buyers have incentive to bundle purchases Competitive advantage: regulation and patents, access to critical suppliers or channels or complementors, organizational capabilities (Lego), strategic fit or consonance (Mercadona: training, generous pay, no layoff policy), scale vs. market size, geographic preemption, build willingness to pay through R&D, advertising or brand image, switching cost, network effects Linear Technology: 1. rivalry low: very differentiated 2. Buyers: chips are small share of costs, each buyer is small part of chip maker’s 3. Suppliers: employees can forward integrate 4. Barriers to entry: expertise, reputation or relationships 4. First mover advantage: each sub-market too small for more than one firm, reputation for quality or reliability Profit=NOPAT-WACC x Capital=(1-tax rate)xOperating Income-WACCxCapital=(1- tax rate)x {(Sales-COGS)/Sales-Operating expenses/Sales-WACCxCapital/Sales}xmarket sharexmarket size Euronext: different buyers care very differently about each dimension, network effects eBay very strong network effects in auction, Amazon in retail relies on economies of scale Envelope strategy: entry by one platform provider into another’s market by bundling own platform’s functionality with that of the market Utility=Income-cost; agency problem: divergent interests and imperfectly observable effort Line of sight: performance does not capture all relevant dimensions of a job. General knowledge: easy to communicate; specific knowledge: costly to communicate Decentralize: more likely when knowledge is specific tradeoff between fostering initiative and incentives and fostering cooperation and coordination PCSD: nonlinear plans can distort agents’ behavior and change who is attracted to the job, multi-part compensation plans seek to