Adam Bede

    Class 1

    How does Google Search create value?

    • B - C
      • B = max WTP for the service
      • C = cost of the service
    • The reason price isn’t in there is b/c we’re talking about value.

    There’s a tension between value creation and capture.

    image

    Google’s model:

    • Search relevance = Query + Location (mobile or desktop)
      • Scores the bid to the relevance, higher weights to the higher quality bidders

    Ask about the difference between value and profit when assessing Prabhakar Raghavan “The man who killed Google Search”

    BHP - Mining Potash

    Value capture = Value created & Share(capture)

    • So, if BHP believes that it’s going to increase the value capture, then it either creates more value or increases the share it captures.
      • Cartels make money by NOT maximizing value creation; they can constrain supply and charge a higher price.
    • Now think of B & C; why would someone be more WTP? They likely wouldn’t. But if BHP could lower their cost then they could increase their possibility to capture.
      • For costs, we could see where our pre dominant cost drivers are. If solution mines are more expensive, we know we have that lever.

    The jansen project is a ploy to show a threat to reduce future earnings of others added value. So those others might pay for Jansen to go away which increases (in their mind) the likelihood that they could buy PCS. So pay to go away.

    Takeaways: Add his slides

    • PCS could maybe capture more but it cannot without violating the cartel. And b/c the price is higher than it would be in a competitve market.
    • Not clear if BHP takes over if they can do anything differently? B/c each potential change could violate the cartel or run into the government.
    • Jansen changes the dynamic. Key is BHP is effecting the industry even if its not producing. An asset threatening value may require them to pay you away.

    Industry Profitability & Five Forces

    Guiding ?: Why are some industries more profitable to others

    5 forces is mainly about “share captured”

    Porter’s 5 Forces:

    1. Substitutes
      1. close substitutes reduce industry profitability; shallow, flat demand curves b/c limit the price difference you can charge for your good. If you try to raise margins, others will flee.
        1. Rail example shows seasonality: Winter profitability more than summer, so St. Lawrence is frozen in the winter
    2. Rivalry
      1. Intense price reduces profitability.
        1. Intense price condition characteristics:
          1. Homogeneous goods + lack of geo differentiation + absence of capacity constraints ]
        2. Symmetry helps cartels. But asymmetry makes it harder to make a split look organic
    3. Threat of Entry
      1. Two variables
        1. How high are barriers to entry BTE
        2. Then how much would price drop?
          1. Is it big enough for both or do you have to replace, not just displace?
    4. Supplier bargaining power
      1. Price takers or have power
    5. Customer bargaining power

    Summary

    • How can my power be dissipated? Five different drains of the bath tub
    • One bad force: Not equal force. One drain can take out any good
    • 5 forces doesn’t answer profitability; it helps shape what you should do and why

    Porter’s insights

    • Deadweight loss: There are transactions not taking place, unrealized gains from trade.