Capital Budgeting: Investing to Create Value erode en income and profits from th

Question

Capital Budgeting: Investing to Create Value erode en income and profits from their brokerage business kerage firms? How are they responding these firms have se What threatens these full-service brokerage f Relate this to our discussion in this chapter 5. Before deregulation in the late 1970s, airlines invested he heavily in new air planes, even though the old airplanes were still very service ulation, airlines are flying their airplanes much longer, and the average age of their fleet has lengthened considerably. Why do you think the airlines have reduced their investment in new airplanes? (Hint: In the chapter we talk about the effect of deregulation on the airlines In the early days of personal computing, software development was a cottage industry, in which individuals wrote program code in their homes. Now Mi crosoft dominates the software industry. If you wanted to form a small s ware development company by investing in a few computers and leasing some office space, what entry barriers would you be facing now? Consider what difficulties you would have that Bill Gates and his contemporaries did ot have 25 years ago 7.Referring to Question 6, in spite of the dominance of Microsoft, small soft- ware developers continue to thrive. What competitive strategy do you think these small developers have followed? In the chapter, we suggested two competitive strategies for capitalizing on market opportunities: differentiation and cost leadership. We have provided some examples of each in the chapter. Consider an industry with which you are probably intimately familiar-fast food. Which fast-food companies ap- pear to follow each of these competitive strategies? 8. 9. Many years ago, W.R. Grace was a steamship company operating passenger liners between the West Coast and Hawaii. Now it is a specialty chemical and energy products manufacturer. Why do you think W.R. Grace made such an abrupt change in its line of business? If you had been a shareholder of W.R Grace, would you have welcomed the change?

Explanation / Answer

6. While starting a small software development company I will have to face the following entry barriers –

(i) Patents – Patents can be significant barrier that will be faced by me when I try and start a small software company. As a new entrant I will find it extremely difficult to invent around software that is patented.

(ii) High level of competition – Competition will be intense in this field and to stand out I will have to offer software that is characterized by innovation that is complex as well as cumulative. This will not be easy for me in the initial stages given the small size of my firm.

(iii) High customer switching costs – Switching costs are high in the software industry and this is applicable even for small sized firms in this industry. Users of particular software will face switching costs in the form of difficulty in learning the use and applicability of a new software.

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