Question $1$: Competitive advantage $(25$ points$)$

Two $($fictitious$)$ companies, Cooltex and Cryocool, provide high$-$precision cooling systems for

supercomputing and genomics applications. Cryocool, the market leader with $75\%$ market share

of unit sales, makes the most precise cooling systems. However, because there are diminishing

marginal returns to precision beyond a certain threshold, Firm Cooltex managed to sell $100$ units

of storage solutions, which were often heavily tailored to customers$$ space constraints.

Their summary financial information is as follows:

Cooltex

Revenue $=$ $$100$M

EBIT margin $=50\%$

Cryocool

Revenue $=$ $$200$M

EBIT margin $=60\%$

Part A $(15$ points$)$: Based on the information above, perform a value$-$based strategy analysis of

two firms by drawing or describing the value sticks. Who has the larger $$wedge$?$ Do either

Cooltex or Cryocool $($or both, or neither$)$ have a competitive advantage? Why? Quantify your

answer.

Part B $(10$ points$)$: Now assume Cryocool has only $60\%$ market share? Do either Cooltex or

Cryocool $($or both, or neither$)$ have a competitive advantage in that scenario? Why? Use value$-$

based strategy and quantify your answer.

Question $2$: Theory of the firm $(25$ points$)$

Assume the information from Question $1$ Part A is correct. Cryocool$$s cooling systems are

assembled using engineered components produced by third parties. One of the most expensive

inputs is the fan system, which Cryocool sources in approximately equal quantities from two

independent companies, FANA and FANB, who are believed to have EBIT similar margins to

Cryocool$$s$.$ When Cryocool$$s production team backward engineered Cooltex$$s system, they

found that Cooltex uses a lower precision, but cheaper, fan system from FANC. The production$2$

team$$s report to the COO recommended acquiring FANC to raise their rival$$s production costs, as

they believe FANC is the sole supplier of fans to Cooltex. The CFO believes a better solution

would be to acquire FANA so they could capture the hefty margins on fans.

Do you agree with the COO, the CFO, both, or neither? Why? Please be sure to use substantive

concepts from the Theory of the Firm to guide your answer.

Question $3$: Platforms $(15$ points$)$

Assume the information above $($i$.$e$.,$ from Question $1$ Part A$,$ and Questions $2)$ is correct. Willis

Carrier the head of marketing for Cyrocool approaches you to help him think about channel

strategy. Pointing to Cyrocool$$s position $$at the nexus of the ecosystem between parts suppliers

and end customers$,$ Carrier proposes strengthening production and sales channels by discounting

Cryocool$$s products to end customers. $$Discounting will not only increase sales, it will also

improve our position with suppliers, further cementing our position as an ecosystem leader,$$

Carrier says. $$Once network effects start working in our favor, we can raise prices and

dramatically increase profitability.$$ What would you advise Mr$.$ Carrier on his proposal? Be sure

to explicitly discuss network effects in this context.