A)

COST OF CAPITAL = (45% × 5.2%) + (5% × 10%) + (50% × 12.5%)

= 9.09%

1. B)

COST OF CAPITAL = (30% × 5.2%) + (5% × 10%) + (65% × 12.5%)

= 10.185%

1. C) According to Brigham (2017), cannibalization is a negative effect on an existing store when the same retailer opens another store close to the existing one hence, lowering the cash flow. This makes some customers to be attracted to the new store. If cannibalization is not properly dealt with, it may lead to failure in the existing business. The main way of curbing cannibalization is self-cannibalization. Some of the companies that have employed self-cannibalization are Apple and Recruit Holding as discussed below.

According to Howard Yu and Thomas Malnigh(2016), one of the ways of curbing cannibalization is engaging in habits of starting a new store that competes with the previous one. For example, Apple in 2005, had a product called iPod mini which was on high demand. They later introduced Nano which reduced the profit of iPod mini. After Nano, they came up witiPhone which incorporated iPod, cell phone, and internet access. Three years later, Apple introduceiPad, MacBook, or iMac. By doing so, they made the customers have a challenge in deciding which product to use.Each of these products fights for their market space. Apple is able to withstand cannibalization hence enables it to make huge profits and be the richest company in the world.

Another way of reducing cannibalization is replacing the product with completely different ones which are better. This method has been used by Recruit Holdings and advertising company in Japan between 1963 and early 2000s. The company has made many publications by use of magazines.After the digital error, the company made several web-based platforms that can compete with the other companies.Later, they upgraded to a unified backbone platform which was much preferred by customers. To enhance innovation, the company started the use of machine learning and artificial intelligence (AI) and later went ahead to operate a mini AI lab. This AI helped the company to fight cannibalization and redefining its mission.

These companies, that is, Apple and Recruit Holdings has also applied another method of minimizing cannibalization which is, setting aside some percentage of money for a new product. A company like Recruit Holdings, set aside thirty percent of its revenue just in case a new product emerges. This method is mostly applied by big companies that have enough capital. By employing this rule, the company is able to effectively replace the old products with the new ones that can compete favourably in the available market.

In conclusion, cannibalization is a decline in the profit of an existing business due to the introduction of a new store by the same company. Large companies like Apple, overcome this by introducing new stores without fear of competition from the old ones. Other companies such as Recruit Holdings replace their old stores with new ones that can compete favourably with the existing one. This enables them to remain relevant and to make more profit.

References

Brigham, Ehrhardt. (2017). ACP Financial Theory & Practice, 15th Edition. [Strayer University Bookshelf]. Retrieved from https://strayer.vitalsource.com/#/books/9781337682947/

Howard Yu and Thomas Malnight (2015). The Best Companies Aren’t Afraid to Replace Their Most Profitable Products. IMD School of business in Switzerland. Retrieved from https://hbr.org/2016/07/the-best-companies-arent-afraid-to-replace-their-most-profitable-products.

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