Spier, Kathryn Business Strategy for Lawyers Spring 2016 course January 20, 2016
BUSINESS STRATEGY FOR LAWYERS
SPRING 2016
Kathryn E. Spier Hauser 302 617-496-0019 [email protected]
CLASS TIME
This class meets on Mondays and Tuesdays from 8:40 to 10:10 in Room WCC B010. This is a 3 credit course.
OFFICE HOURS
Professor Spier’s office hours are Thursdays from 10:00 to 11:45 or by appointment.
COURSE DESCRIPTION
This course presents the fundamentals of business strategy to a legal audience. The class sessions include both traditional lectures and business-school case discussions. The lecture topics and analytical frameworks are drawn from MBA curriculums at leading business schools. The cases are selected for both their business strategy content and their legal interest.
The main course material is divided into four parts. The first part presents the basic frameworks for the analysis of strategy. The topics include economic and game theoretic approaches to strategy, competitive advantage and industry analysis. The second part is concerned with organizational and contractual responses to agency problems. Topics include pay-for- performance, corporate control, and the design of partnerships and other business associations. Spier, Kathryn Business Strategy for Lawyers Spring 2016 course
The third part takes a broader view of business associations, considering the horizontal and vertical scope of the firm and the advantages of hybrid organizational forms such as franchising and joint ventures. The fourth part covers special topics in competitive strategy, including product differentiation, tacit collusion, facilitating practices, network externalities, market foreclosure, and innovation.
This course is well-suited for students interested in economic analysis of the law with a strong business and industry focus. Because of the significant overlap with the MBA curriculum, this class is not appropriate for students in the JD-MBA program. Since the lectures and assignments focus on abstract frameworks and theoretic approaches, a basic familiarity with economic reasoning and algebra is assumed.
TEACHING METHOD
The class will consist of a combination of lectures and class discussion. I expect students to come to class prepared. Student preparation of assigned materials and involvement in class discussion is essential for the success of the course.
READINGS
The required readings for the class will be available electronically. Students can purchase the case packet for this class directly from Harvard Business School Publishing at the following link: https://cb.hbsp.harvard.edu/cbmp/access/45111886 . Other readings, including chapters from books and newspaper articles, will be posted to the class webpage.
GRADING AND REQUIREMENTS
Requirements include a final exam (75%), three assignments (10%), and in-class quizzes (15%).
The final exam will be given during the final exam week at a date and time TBA.
The three assignments are due on February 22, March 22, and on April 19. They are analytical and designed to reinforce the material from the readings and lectures and to prepare students for the final exam. Students are welcome to work with partners or small groups (no more than 4). When working in groups, however, each member should read the assignment and think carefully about it before collaborating. Students are welcome to turn in their assignments in class or using the drop box on the class website.
There will be review/extra-help sessions on February 19, March 11, and April 15 from 3:00 to 4:30 in Room TBA. The sessions are completely optional, and are geared towards students who could use some extra practice with the class tools and concepts.
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There will be a very short quiz before each case discussion (indicated in bold on the syllabus), generally administered at the beginning of class. These quizzes will be multiple choice and will not be onerous for students who are prepared for class. Excluding the first case discussion (Wachtell), there are 11 cases throughout the semester and the lowest two scores will be dropped. Students who expect to miss more than two case discussions – or are chronically late or unprepared for classes – should not enroll in this class. Exceptions will be made only in very unusual circumstances, as specified in the HLS guidelines for deferred examinations. Students with medical or family emergencies should contact the Dean of Students Office.
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PART 1: BASIC FRAMEWORKS
INTRODUCTION TO STRATEGY
MONDAY, JANUARY 25
Readings:
Michael Porter, “What is Strategy?” Harvard Business Review, Nov-Dec 1996.
“Marketing” at Wachtell, Lipton, Rosen, and Katz (HBS: 9-496-037)
Discussion Questions:
Identify at least three ways that Wachtell Lipton differs from the typical firm in the “Am Law 100.”
What is Wachtell Lipton's “strategic position”?
Could another firm successfully imitate Wachtell Lipton's strategy?
COMPETITIVE ADVANTAGE
TUESDAY, JANUARY 26
Readings:
Competitive Advantage (HBS: 8105)
‒ This interactive reading is in your Harvard Business School Publishing Packet.
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INDUSTRY ANALYSIS & COLA WARS CASE DISCUSSION
MONDAY, FEBRUARY 1
Readings:
Besanko et al. “Performing a Five-Forces Analysis,” pp. 258-264 in Chapter 8 of The Economics of Strategy, 4th ed., Wiley, 2013.
Cola Wars Continue: Coke and Pepsi in 2010 (HBS: 9-711-462)
Discussion Questions:
Why, historically, has the soft drink industry been so profitable?
Compare the economics of the concentrate business to that of the bottling business. Why is the profitability so different?
How has the competition between Coke and Pepsi affected the industry’s profits?
Can Coke and Pepsi sustain their profits in the wake of flattening demand and the growing popularity of non-CSDs?
MICROECONOMICS BASICS
TUESDAY, FEBRUARY 2
Readings:
A Note on Microeconomics for Strategists (HBS: 9-799-128)
‒ This reading is in your Harvard Business School Publishing Packet.
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HUSKY INJECTION MOLDING SYSTEMS CASE DISCUSSION
MONDAY, FEBRUARY 8
Readings:
Husky Injection Molding Systems (HBS: 9-799-157)
Discussion Questions:
What is Husky’s strategy? How is it positioned relative to its competitors? Why has the company been so successful in the period prior to the recent problems?
Suppose that large customer wants to produce 420 million thinwall containers per year. Assuming that they would run their injection molding machines for 20 hours per day, how many Husky machines would they need to purchase? How many of the competitor’s machines would they need to purchase? (You should get single digit answers.)
The case tells us that Husky charges $400K for a thinwall system, which is $50K higher than the price charged by competitors. Is the Husky machine worth it? Could Husky charge more? If so, how much more could they charge?
Recall that for a given customer, the relative willingness to pay advantage is equal to the price premium a firm can charge without losing the customer. That is, Husky can charge a premium if it produces a better product than its competitors: PH = PC + (BH – BC). So the real question is now much extra value a customer gets from a Husky machine: BH – BC.
Now consider the Husky system that makes PET preforms for soft drink bottles. Is the Husky system really worth the additional $200K? In answering this question, you will need to calculate how many preforms a Husky PET system make in a year, and compare this to the competitor’s system. Exhibit 6 in the case gives information that will allow you to quantify several different sources of cost savings for the customer. Which are the most important?
What has caused Husky’s current difficulties?
How should Robert Schad, Husky’s CEO, respond to the current challenges?
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GAMES AND DECISIONS
TUESDAY, FEBRUARY 9
Readings:
L. Cabral, “Games and Strategy,” pp. 49 - 63, Chapter 4 in Introduction to Industrial Organization, Cambridge: M.I.T. Press, 2000.
DEBEERS CASE DISCUSSION
MONDAY, FEBRUARY 15
Readings:
Forever: De Beers and U.S. Antitrust Law (HBS: 9-700-082)
Extra Notes on De Beers.
Discussion Questions:
What roles does DeBeers play in the diamond industry?
Identify ways that DeBeers is creating new value and destroying existing value.
Why do the major diamond producers agree to do business with DeBeers?
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ANTITRUST AND COMPETITIVE STRATEGY
TUESDAY, FEBRUARY 16
Guest Lecturer:
Professor Hillary Greene, Inaugural Director of the Intellectual Property and Entrepreneurship Law Clinic and Professor of Law, University of Connecticut; Visiting Scholar, Harvard Law School; Former Project Director for Intellectual Property and Acting Deputy Assistant General Counsel for Policy Studies, Office of General Counsel, Federal Trade Commission.
Readings:
Note on Antitrust and Competitive Tactics (HBS: 9-703-493) ‒ This reading is in your Harvard Business School Publishing Packet.
Additional background material may be found in the FTC’s Guide to Antitrust Laws: https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws
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PART 2: AGENCY PROBLEMS IN ORGANIZATIONS
PAY-FOR-PERFORMANCE
MONDAY, FEBRUARY 22
Assignment #1 Due Today
Readings:
E. Lazear, “Variable Pay or Straight Salary?” pp. 97 - 131, Chapter 5 in Personnel Economics for Managers, Wiley, 1998.
MGOA PHYSICIANS CASE DISCUSSION
TUESDAY, FEBRUARY 23
Readings:
Performance Pay for MGOA Physicians (A) (HBS: 9-904-028)
Discussion Questions:
In what ways does pay differ between academic physicians and private practitioners? Why do they differ?
If you were a physician and MGOA, what kinds of activities would you want your colleagues to pursue? Why?
Do you think that Herndon and Rubash's proposed new plan is a good idea?
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INTERNAL LABOR MARKETS
MONDAY, FEBRUARY 29
Readings:
J. Brickley et al. “Attracting and Retaining Qualified Employees,” pp. 381 - 411, Chapter 14 in Managerial Economics and Organizational Architecture, 4th ed., Irwin, 2007.
‒ In this chapter, you should pay particular attention to the discussion of (1) human capital, (2) long-term employment relationships, and (3) job seniority and pay. We will not be discussing fringe benefits in class, so you can skip pages 399– 407.
VLG CASE DISCUSSION
TUESDAY, MARCH 1
Readings:
Venture Law Group (A) (HBS: 9-800-065)
Discussion Questions:
Do the lawyers at VLG have general-purpose human capital? Do they have firm- specific human capital?
In your opinion, what is the most important way that VLG creates value for its clients?
On page 8, Craig Johnson is quoted as saying: “to do this, the fee model doesn't work. We need equity.” Do you agree with him?
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CIRCON CASE DISCUSSION
MONDAY, MARCH 7
Readings:
Circon (A) (Abridged) (HBS: 9-904-023)
Discussion Questions:
What motivated Circon Chairman and CEO Richard Auhll? Did he have financial incentives that strongly aligned his interests with those of the shareholders?
Put yourself in Auhll’s shoes moments after leaving the telephone call from US Surgical CEO Leon Hirsch. How should you respond to the hostile bid? What factors would you consider? What factors should you consider (if different)?
Put yourself in the shoes of George Cloutier, moments after being asked by Richard Auhll to join the Circon board. Would you agree to be on the board? What role would you wish to play? Is your role consistent with your “duty of care” as a member of the board?
Put yourself in the shoes of Charles Elson immediately after getting elected to the Circon board. How do you assess your situation? What are your options? How do you achieve change within the board and/or within the company?
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PART 3: THE “SCOPE” OF THE FIRM
CORPORATE DIVERSIFICATION AND MERGERS
TUESDAY, MARCH 8
Readings:
S. Oster, “Corporate Diversification,” Chapter 10 in Modern Competitive Analysis, 3rd ed., Oxford, 1999.
March 14 & 15:
NO CLASS
INTELLECTUAL VENTURES CASE DISCUSSION
MONDAY, MARCH 21
Readings:
Intellectual Ventures (HBS: 9-710-423)
Discussion Questions:
Why is the market for patents so illiquid and inefficient?
Does Intellectual Ventures (IV) have the right strategy to solve/mitigate the market inefficiencies? Why or why not?
In what ways is IV similar to a patent troll? In what ways are they different?
What strategy would you recommend to Nathan Myhrvold going forward? In particular, should IV resort to aggressive litigation? Why or why not?
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THE MAKE-OR-BUY DECISION
TUESDAY, MARCH 22
Assignment #2 Due Today
Readings:
S. Oster, “Vertical Linkages,” Chapter 11 in Modern Competitive Analysis, 3rd ed., Oxford, 1999.
“Building Power Plants That Can Float,” Wall Street Journal, May 22, 1996.
FRANCHISING CASE DISCUSSION
MONDAY, MARCH 28
Readings:
Pizza Hut, Inc. (HBS: 9-588-011)
“Chicken and Burgers Create Hot New Class: Powerful Franchisees,” The Wall Street Journal, May 21, 1996.
“Franchisees with Advanced Degrees,” New York Times, June 2, 2005.
Discussion Questions:
In the “Chicken and Burgers” article, do you think Mr. Kazi would be equally valuable as a manager of company-owned units? Explain.
Why do you think some of Pizza Hut's units are franchised and others are company owned?
Does the IPHFHA create or destroy value in the vertical chain?
Why is there disagreement between Pizza Hut and its franchisees over the home- delivery strategy? (What are Pizza Hut's objectives? What are the objectives of the franchisees?)
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PART 4: COMPETITIVE STRATEGY
CARTELS AND TACIT COLLUSION
TUESDAY, MARCH 29
Readings:
L. Cabral, “Collusion,” pp. 127-146, Chapter 8 in Introduction to Industrial Organization, Cambridge: M.I.T. Press, 2000.
– This is one of the more technical/abstract readings of the semester. Don’t be thrown off by the algebra; we will be reviewing the analytics in class.
J. M. Connor, “Global Cartels Redux: The Lysine Antitrust Litigation (1996),” in John Kwoka and Lawrence White, eds., The Antitrust Revolution, 5th Edition (2009).
– This chapter describes the inner workings of the global Lysine cartel in the 1990s and the undercover investigation by the U.S. Department of Justice. Please focus on pages 300 – 311 only. (We will not discuss the overcharge calculations.)
A. Q. Nomani, “Fare Warning: How Airlines Trade Price Plans,” The Wall Street Journal, October 9, 1990.
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GE VS. WESTINGHOUSE CASE DISCUSSION
MONDAY, APRIL 4
Readings:
General Electric vs. Westinghouse in Large Turbine Generators (HBS: 9-380-128)
Discussion Questions:
On the top of page 5, the case explains that costs fall when “cumulated output” rises. What does this mean? Why is this happening?
– Read pages 222 through 225 of the Saloner et al. chapter reading for next time. The excerpt is titled “Incumbency Advantages of Cumulative Investment.”
Exhibit 8 suggests that GE has consistently outperformed its main competitor, Westinghouse, over the years. Why is this? What accounts for the difference in the margins?
‒ The experience curve described on the top of page 5 has the following form: . " " ∗ . Suppose that GE and Westinghouse are in different places on the same experience curve. GE’s cumulated output and direct cost are XGE and CGE, respectively; Westinghouse’s cumulated output and direct cost are XW and CW, respectively. Then using the formula above, one can show that:
. . .
The case also indicates that direct costs fall by 38% when the unit size doubles. Letting SGE and SW be the unit sizes of GE and Westinghouse’s turbines, this implies that:
. . .
The turbine generator industry is highly concentrated. Despite that, price competition has become quite brutal since 1959. Why?
In 1961 General Electric released a new price book and announced that it would only sell at that book price. What was GE's purpose in doing this? Why did Westinghouse and Allis-Chalmers react the way in which they did?
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CREATING BARRIERS TO ENTRY
TUESDAY, APRIL 5
Readings:
G. Saloner, et al. “Entry and the Advantage of Incumbency,” pp. 215-238, Chapter 9 in Strategic Management, Wiley, 2001.
“Amid Probe, Anheuser Conquers Turf,” The Wall Street Journal, March 9, 1998.
LAUNCHING TELMORE CASE DISCUSSION
MONDAY, APRIL 11
Readings:
Launching Telmore (A) (HBS: 9-708-414)
Discussion Questions:
How aggressive is Telmore’s business model toward that of TDC? Using Exhibits 3 and 4, calculate TDC’s cash costs per user (revenue ‒ cash costs = EBITDA). Using Exhibit 9, calculate Telmore’s cash costs per user under a 100,000 subscriber scenario. How significant is Telmore’s cost advantage over TDC? Using Exhibits 3 and 4, calculate annual EBITDA per customer for TDC. Using Exhibit 8, calculate the revenue benefit to TDC per Telmore customer (assuming wholesale rates of DKK 0.50 per minute and DKK 0.18 per text message). Assuming that TDC’s cost of providing network capacity to Telmore is insignificant, what is the EBITDA benefit to TDC per Telmore customer? If Telmore is able to grow its customer base from 32,000 customers to 232,000, what is the net EBITDA effect on TDC? Assume (for the purposes of this question) that the market will not grow; that is, that all of Telmore’s new customers are taken from one of the network operators. Assume that customers are taken from TDC proportional to TDC’s market share relative to the other network operators (see Exhibit 3). How should TDC respond to Telmore’s entry?
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STRATEGY AND INNOVATION IN NETWORK ECONOMIES
TUESDAY, APRIL 12
Readings:
G. Saloner, et al., “Strategy in Markets with Demand-Side Increasing Returns,” pp. 305- 328 in Chapter 12 in Strategic Management, Wiley, 2001.
“A Bundle of Trouble,” The Economist, July 7, 2001.
TESLA MOTORS CASE DISCUSSION
MONDAY, APRIL 18
Readings:
Besanko et al. “The Origins of Competitive Advantage: Innovation, Evolution, and the Environment,” pp. 429-443 in Chapter 13 of The Economics of Strategy, 4th ed., Wiley, 2007.
Tesla Motors (HBS: 9-714-413)
Discussion Questions:
What are the key barriers to entry into the electric vehicle segment of the automobile industry in the United States? Is Tesla at a competitive advantage or disadvantage relative to BMW? How will its relative position evolve over time? In the long run, who will come to lead the market for mass-produced electric cars, an entrant or an incumbent?
COURSE WRAP UP AND REVIEW
TUESDAY, APRIL19
Assignment #3 Due Today
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