MBA 610 Case Problem Assignment Solution

| August 14, 2017

MARKET STRUCTURE ANALYSIS AT COLUMBIA DRUGSTORES, INC.Background:Demonstrating the tools and techniques of market structure analysis is made difficult bythe fact that a firm’s competitive strategy is largely based upon proprietary data. Firms jealouslyguard price, market share, and profit information for individual markets. No one should expectTarget, for example, to disclose profit-and-loss statements for various regional markets or on astore-by-store basis. Competitors like Wal-Mart would love to have such information available.It would provide a guide for their own profitable market entry and store expansion decisions.To see the process that might be undertaken to develop a better understanding of productdemand conditions, consider the hypothetical example of Columbia Drugstores, Inc., based inSeattle, Washington. Assume Columbia operates a chain of 30 drugstores in the PacificNorthwest. During recent years, the company has become increasingly concerned with the longrun implications of competition from a new type of competitor, the so-called superstore.To measure the effects of superstore competition on current profitability, Columbia askedyou to conduct a statistical analysis of the company’s profitability in its various markets. To netout size-related influences, profitability was measured by Columbia’s gross profit margin, orearnings before interest and taxes divided by sales. Columbia provided you with proprietarycompany profit, advertising, and sales data covering the last year for its 30 stores, along withpublic trade association and Census Bureau data concerning the number and relative sizedistribution of competitors in each market, among other market characteristics.You have decided to conduct a regression-based analysis of the various factors thought toaffect Columbia’s profitability. To aid you in this process, Columbia created the accompanyingspreadsheet entitled “Case_Data.xlsx.” The data contained in this spreadsheet are described asfollows, where the variable name (as it appears in the spreadsheet) is in italics.The variable Store Number identifies a particular Columbia drugstore. The dependentvariable is Profit Margin, which as stated before, is Columbia’s gross profit margin. Thefollowing independent variables are thought to affect Columbia’s profitability. The variableMarket Share is the relative size of leading competitors in a store’s market, measured at theStandard Metropolitan Statistical Area (SMSA) level. Columbia’s market share in each area isexpected to have a positive effect on profitability. The Market Concentration Ratio, measured asthe combined market share of the four largest competitors in any given market, is expected tohave a negative effect on Columbia’s profitability given the stiff competition from large, well-financed rivals. Both Capital Intensity, measured by the ratio of the book value of assets tosales, and Advertising Intensity, measured by the advertising-to-sales ratio, are expected to exertpositive influences on profitability. Growth, measured by the geometric mean rate of change intotal disposable income in each market, is expected to have a positive influence on Columbia’sprofitability, because some disequilibrium in industry demand and supply conditions is oftenobserved in rapidly growing areas. Finally, to gauge the profit implications of superstorecompetition, the variable Superstore Dummy takes the value of ‘1’ if Columbia faced superstorecompetition in a particular store’s market and ‘0’ otherwise.Assignment:In five-to-seven pages of double-spaced writing in a Word document, answer the followingquestions:1. Based on the text above, build a multiple linear regression population model to analyzethe impact of the preceding determinants on Columbia’s profitability. What is themultiple linear regression population equation? What are the assumptions underlying themodel?2. Using Excel and the accompanying dataset, estimate the population model. Copy andpaste your Excel output into your Word document.3. Based on the Excel output, what is the estimated regression equation?4. Interpret all coefficient estimates. Identify the significance level for all of theseestimates. Are any of the independent variables likely to actually influence Columbia’sprofitability? Are your estimates consistent or inconsistent with the a priori conjuncturesfound in the article? (E.g., advertising intensity is thought, a priori, to increase profitmargin. Does your coefficient on advertising intensity and its associated p-value suggestthat it is directly correlated with profit margin?)5. What portion of the variability in profit margin is explained by variability in theindependent variables? Is the estimated regression equation a good fit for explainingprofit margin?6. Based on the estimate of the coefficient on Superstore Dummy and its associated p-value,do you believe that superstores pose a threat to Columbia’s profitability? Expand on thetheoretical foundation for this conclusion, i.e., why would the existence of competitorsuperstores affect Columbia’s profitability?

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