May Examination Period 2021 ECN302 Corporate Strategy Duration: 3 hours Answer ALL questions in Section A and THREE questions in Section B. Section A carries 40 marks and Section B carries 60 marks. If you answer more questions than specified, only the first answers (up to the specified number) will be marked. Delete any answers that you do not wish to be marked. The final submission on QMplus is the version that will be marked. This examination paper MUST NOT be shared with anyone else. Doing so will be considered a very serious assessment offence under the Queen Mary Academic Misconduct Policy. This examination is an individual assessment and must be entirely your own work. All work will be run through the plagiarism software, Turnitin. The software will also compare your script against all other student submissions. Any evidence of plagiarism or collusion will be taken forward as academic misconduct. Calculators are permitted in this examination. Please ensure that your working is clearly shown with all steps of your calculation included in your answer document, including any formula used. When writing formulas, please note the following: It is acceptable to use the standard alphabet rather than Greek letters. The following are recommended: m for , s for , w for , r for , d for , b for For mathematical operators: add +, subtract -, multiply *, and divide / Where appropriate, use an underscore to indicate a subscript, Eg r_f for rf Use the ^ character for power, eg x^2 for x2, x^0.5 for √x As an alternative to x^.5 you may type sqrt(x). Use brackets as necessary. To make your answer clearer use different brackets where appropriate, eg [] {} () Examiner: Dr Rachel Male © Queen Mary University of London, 2021 Page 2 ECN302 (2021) Section A. Answer ALL questions. Please read the case study on the mobile gaming company Zynga on pages 5 and 6, and the information below. Figure 1. Revenues for the gaming industry 2015 – 2020, by segment. Source: Statista.com (2021) Question 1. a. Use the Five Forces Framework (Porter, 1980) to assess the main sources of competitive pressures in the gaming industry. [15 marks] b. Given this, explain Zynga’s corporate strategy in terms of where and how they are competing. Does Zynga have a competitive advantage? Explain your answer. [10 marks] Question 2. There is a potential entrant, E, with the technical capabilities to enter the global gaming industry. As a corporate strategist advising the firm on how to enter the market, explain to Firm E (i) which segment should they enter and why, and (ii) what threats they should expect to face on entry. Given this, determine an entry strategy for Firm E or explain why Firm E should not enter the industry. [15 marks] ECN302 (2021) Page 3 Section B. Answer THREE questions. All questions carry 20 marks. Question 3. a. “In an industry with firm asymmetries and high buyer concentration internal rivalry will be strong.” Is this statement true or false? Explain your answer. [5 marks] b. In an industry with low concentration and weak horizontal differentiation, will firms follow a share strategy or a margin strategy? Briefly explain your answer. [4 marks] c. A large firm with a competitive advantage in the domestic market is contemplating expansion to enter a foreign market. The firm produces a product which is not tradeable. Explain the key entry considerations for the firm and a strategy for how the firm can enter the foreign market. [6 marks] d. If the large firm successfully enters the foreign market, how will this affect the competitive pressures in the foreign market? [5 marks] Question 4. a. For a firm following a cost leadership strategy, what is the difference between benefit proximity and benefit parity? Explain how a firm could achieve benefit parity. [5 marks] b. How does reputation and buyer uncertainty provide a firm with an early mover advantage? Briefly explain if this is more important for the producers of an experience good or a search good. [5 marks] c. There are 5 firms competing in the market for cement. The product is homogeneous. The marginal cost of each firm is 20. Weekly demand is given by P = 580 – Q, where P is price and Q is quantity. (i) Once prices are set in this market, they cannot be changed. Customers will choose the lowest price product. What price will the five firms charge and why? (ii) Now assume that firms make pricing decisions on a weekly basis and have a weekly discount rate of 0.2%. The current market price is 120 but firm 1 wants to increase its price to the monopoly price. Explain if firms 2, 3, 4 and 5 will follow suit. What if there are 30 firms producing the same good? Explain your answer. (iii) If the five firms sell to different construction companies and do not publically disclose their prices, how will this affect the sustainability of cooperative pricing between the five cement manufacturers? Why? [10 marks] Page 4 ECN302 (2021) Question 5. a. “Brand proliferation is only a credible entry deterrence threat if producers set a limit price.” Is the statement true or false? Explain your answer. [6 marks] b. Consider an industry consisting of an incumbent (M) and an entrant (E). Each year, market demand for this industry is given by P = 800 – (qM + qE), where P is price and q is quantity. The incumbent firm faces costs of CM(qM) = 280(qM). The potential entrant faces costs of CE(qE) = 280(qE) + F, where F is the fixed cost of entry. (i) Under what conditions would entry be blockaded? What does this imply for the incumbent and the entrant? (ii) If the entrant has fixed costs of entry, F = £8,000, explain the incumbent firm’s optimal strategy in response to the threat of entry. What level of capacity should M pre-install? [14 marks] Question 6. a. “A firm can only be a multi-sided platforms if it is vertically integrated.” Is this statement true or false? Explain your answer and give an example of a multi-sided platform. [6 marks] b. A monopolist (M) has the technology to expand production to a second good (Y). It has the choice of expanding production of its current product (X), switching production to the second good (Y), or producing both goods. The cost of the investment to expand production of good X is £150,000 per annum, or for an additional £60,000 per annum the firm can make both goods. The £60,000 per annum additional investment to make goods X and Y is only available if the firm has first paid the £150,000 to expand production of X. If the firm chooses to produce only good Y, the investment cost is £80,000 per annum. The cost of producing X is £1.20 per unit and the cost of producing Y is £1.60 per unit. If the expected quantity of X and Y per year are 100,000 and 250,000 respectively, should M produce both goods? Briefly explain your answer. [3 marks] c. The two goods, X and Y, are complements. If M expands production to both goods, explain how this will affect the price M charges for good X. [5 marks] d. M has the option to enter an exclusive contract with Firm A for the production of good X; this will require additional investment for specialist equipment. The cost of the specialist equipment will be covered by a loan with annual payments of £450,000. Firm A has agreed to pay a price of £11.50 per unit for the specialist units of X. If M cannot sell these to A, it will sell to the other firms in the market at a price of £5.50 per unit. Will M agree to the exclusive contract? Explain your answer. [6 marks] End of Paper – An Appendix of 2 pages follows. ECN302 (2021) Page 5 Zynga looks to expand after reaching new heights on High Heels! Mobile-only gaming company hunts for acquisitions that can be played on multiple devices ‘High Heels!’ is currently the most downloaded iPhone app in the US © Rollic Games/Zynga/Polygon Patrick McGee in San Francisco FEBRUARY 14 2021 Zynga, the mobile gaming company that has the most downloaded iPhone app in the US, is again on the hunt after six acquisitions in the past five years. But while its recent buys — including a $1.8bn deal last year for Turkey’s Peak Games — have been focused on mobile-only, Zynga chief executive Frank Gibeau said there were more opportunities for Zynga to acquire young teams as it pushed “further afield” into games that could be played on multiple devices. “We’re going to [launch] new cross-platform games, games that are able to be played across mobile PCs and consoles together,” Gibeau told the Financial Times. Zynga is owner of Zynga Poker, Social Slots, Words With Friends. It has recently scored a big hit with High Heels!, a first-person game in which users strut around obstacles in absurdly tall platform shoes to earn accolades such as “Queen!” It is the number one iPhone app in the US. The game went viral on TikTok — the second most popular app — and is being downloaded more than any other free app on the iOS App Store, outranking YouTube, Zoom and Clubhouse, according to App Annie, the mobile data and analytics provider. On Android, High Heels! ranks fourth. Zynga’s foray into “hyper casual” titles — inexpensive games made for the moment that are free- to-play but can be highly lucrative through advertisements — helped revenues last year shoot up 49 per cent to $2bn. The company’s market value of $12bn is up more than 500 per cent in the past five years as mobile gaming has become the fastest growing segment in the gaming market. According to App Annie, gaming makes up more than one-third of App Store downloads but accounts for 70 per cent of consumer spending. Continues on next page… Page 6 ECN302 (2021) The data provider projects the market will surpass $120bn in consumer spending this year. That is larger than global recorded music revenues or film revenues including cinemas, mobile and streaming. Gibeau told the FT that the rise of mobile gaming was causing “tectonic changes” in the industry as small budget teams can leverage graphics engines from gaming development groups Unity and Unreal, computing power from Amazon Web Services, and high-performance internet from 5G, and then compete for attention with some of the biggest companies in the world. “When I was doing this 10 years ago at EA (Electronic Arts) you would have to spend hundreds of millions of dollars in tech development tool and infrastructure to make that happen,” Gibeau said. “Now, because the tools are so darn good, very small companies can get in. The barrier to entry into these things has really dropped dramatically.” Last year there were 105 gaming acquisitions for a total of $17bn, the highest in six years of Dealogic data. Traditional gaming incumbents such as Activision Blizzard, the $80bn group behind Call of Duty, purchased Candy Crush Saga maker King in 2015 for $5.9bn and said last year it would bring “all our franchise to mobile over time.” EA, valued at $41bn, last week said it would pay $2.4bn for Glu Mobile, best known for its hit game involving an animated Kim Kardashian. The world’s biggest companies are involved too, with Apple, Google and Amazon all vying for supremacy with “Netflix for gaming” streaming services. Compared to these giants, Gibeau said: “We’re clearly of the new barbarians.” He argued Zynga has an advantage with its mobile-first strategy, as the bigger rivals are usually trying to convert hit console games into a free-to-play mobile experience. Shifting in the other direction, from mobile to console, he said, is easier because “we’re capturing more data about what players are doing.” Gibeau calls gaming “one of the richest places to run ads”, adding that Zynga sends its user video ads when they are stuck in a game; by watching the video they earn rewards. “Players that watch ads inside games play the games longer,” he said. “Whereas on YouTube, you get hit with an ad and you’re saying, ‘OK how fast can I skip this?’ It’s a different dynamic.” Zynga’s ad business grew 47 per cent last quarter to $117m in revenue. In the year ahead Zynga expects total revenues to climb 32 per cent to $2.6bn, and forecasts double-digit gains in 2022. The long view indicates that Zynga expects rapid growth even if Covid- 19 — whose effects clearly helped the gaming market — wanes and people return to the workplace. “This category hasn’t peaked — it’s got growth happening in AR, VR,” Gibeau said. “It’s got growth built into it for the next 10 years.” Copyright The Financial Times Limited 2021. All rights reserved. Source: McGee, Patrick (2021) ‘Zynga looks to expand after reaching new heights on High Heels!’ The Financial Times Limited, February 2021. Available at: https://www.ft.com/content/46c3a499- 8cca-4ca5-a9ea-34e1b503afec (accessed 10th March 2021) End of appendix.
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