Instructions:

Instructions: • Read each of the questions carefully. You will demonstrate your analytical ability best by answering only the question that is asked. • Please make sure that you have all 4 pages of this 4-page exam, as well as the article “Getting Tesla from Here to There” (contained in a separate .pdf file). • Answers will be graded based both on their correctness and on their quality. Higher quality answers are concise, persuasive, supported by evidence, and apply the concepts of the course appropriately. You will be graded on the LOGIC and ANALYSIS in your answer, not the particular vocabulary that you use. However, I expect you to apply the concepts we have discussed in class appropriately. • Generous length guidelines will be given for each question. Ideal answers will fit well within these guidelines. Longer answers will be accepted, but it is difficult for an answer to both exceed the length guidelines and be concise (see above). No Outside Sources are Needed Part I: Conceptual Questions – Answer all 5 questions (8 pts. each/40 pts. total). Instructions: Answer True, False or Uncertain – with an explanation (a concise explanation for each would not exceed 150 words). You will be graded on the quality of your explanation. 1. Firm strategies are evaluated based on their ability to maximize profits, which are equal to (P – C)* Q. True, False, or Uncertain: This means firms should organize their efforts around becoming their industry’s efficiency leader by taking every opportunity to lower its costs. 2. Hold-up will lead to vertical integration if the threat of ex post opportunism makes a supplier unwilling to make the necessary investments to provide the input. True, False or Uncertain: The hold-up problem is more severe in a case where the terms of the optimal contract between a buyer and supplier can be written very concretely and can be credibly enforced by a neutral third party. 3. On December 4, 2012, it was announced that Netflix had reached a deal with Walt Disney to acquire exclusive internet streaming rights for Disney, Pixar and Marvel films. A NY Times analyst noted “with the Disney deal, Netflix will be able to offer customers exclusive access to a pipeline of films that are reliably some of the year’s biggest box-office successes.” True, False, or Uncertain: The exclusive rights represent a resource that will contribute to a competitive advantage for Netflix. 4. SkyMedia pioneered the airplane advertising business above Chicago. The firm uses small planes with banners attached to them, and it flies these planes over events with a large number of spectators, such as Chicago Bears football games and outdoor music festivals. Upon observing Sky’s success, another firm, Air Media, acquired a fleet of small planes, equipped them to tow banners, and entered the airplane advertising industry. Price competition soon followed, driving the price of airplane advertising from $400/hour to $250/hour. Sky responded by buying Air Media at a substantial premium and signing Air Media’s (now-former) owner to a non-compete clause. True, False, or Uncertain: Since Air Media was Sky Media’s only significant competitor, Sky’s purchase of Air Media is likely to restore Sky’s long-term profitability. 5. Physicians have developed a treatment protocol in which three drugs made by separate pharmaceutical companies, when used in combination, are very effective in treating a rare blood disorder. True, False, or Uncertain: Because all three drugs are necessary for effective treatment, each generates the same amount of “added value” for the pharmaceutical company that produces it. Part II: New Article Questions – Answer all three questions (60 pts. total) In “Getting Tesla From Here to There,” a journalist for the New York Times recounts his experience at a Tesla dealership in Manhattan. The writer, James B. Stewart, describes the publicly traded company’s efforts to reinvent “the automobile with a zero emission, all-electric model that in performance, appearance, technology and comfort puts the legacy automakers to shame.” Please read the attached article and answer the three questions below. You will not need to do additional research beyond the article to effectively answer the questions. 1. (20 points) Along with its electric capabilities, a Tesla automobile includes features such as sleek styling, internet capabilities and rapid 0-to-60 acceleration. The article notes that most Tesla customers are already driving BMW 7 Series, Mercedes S-Class, Porsches and other high-end performance cars. Evaluate Tesla’s strategic decision to design its electric vehicle as a “high-end” luxury car. Under what conditions would such an approach lead to success? What would be the advantages of producing a more “affordable” version of the Tesla instead? (a concise explanation would not exceed 250 words) 2. (20 points) As part of the development process, Tesla has applied for and received patent protection for hundreds of innovations relating to the design of battery packs, charging stations, and engine design. Yet, in July 2014, Tesla Motors announced that it would no longer protect its patents if other companies were to develop electric cars using Tesla’s intellectual property. Effectively, Tesla’s decision allows any competitor to replicate the features of Tesla’s cars, including those features that are currently unique to Tesla’s vehicles. In class, we mentioned that patents are assets that can prevent competitors from imitating the sources of a firm’s competitive advantage. Given this, how could giving away its intellectual property contribute to Tesla’s long-term profits? (a concise explanation would not exceed 250 words) 3. (20 points) In October of 2014, Tesla acquired a 980-acre industrial park east of Reno, Nevada and began construction of its “gigafactory” where it will manufacture lithium-ion batteries for its next generation of automobiles. Provide (and explain) two reasons why a “make” strategy may be better than a “buy” strategy for Tesla when it comes to batteries? Hint: use the conceptual ideas from the vertical integration topic will be useful in organizing your answer. (a concise explanation would not exceed 250 words)