SS Lecture 1

0:01hello and welcome

0:03to my strategy class my name is Shelby

0:06Solomon or Dr Solomon you can just call

0:09me

0:10Shelby but anyways welcome this will be

0:13our first

0:14lecture and I hope you enjoy this class

0:17and topic as much as I particularly

0:20enjoy teaching strategy and learning

0:23about it and having the opportunity to

0:26work with all of you so here's a broad

0:29overview of this particular lecture in

0:32this lecture we'll be covering sort of

0:35the scope of this class where we're also

0:38headed in the following lectures and

0:41classes but these are our main

0:45objectives for the current lecture one I

0:49want you to understand what a company

0:51strategy is we'll try to Define

0:54strategy two I want you to understand

0:57the concept of sustainable

1:00competitive

1:02Advantage three I want you to understand

1:05the five generic or basic strategies

1:07companies use four you should understand

1:11why strategies tend to evolve and change

1:14over

1:16time five we'll talk about business

1:18models and then six we'll end on talking

1:21about what are the different test of a

1:23winning

1:24strategy so first What is strategy well

1:28defining the word strategy is kind of a

1:30hard word to Define there's a lot of

1:32different perspectives on What is

1:34strategy and there's a lot of people who

1:35study strategy and have approached it

1:38from a number of different angles some

1:41people look at strategy like in terms of

1:44like

1:46optimization um and take like a very

1:48mathematical Approach at it others look

1:51at strategy as like sort of this sort of

1:54evolutionary process and take sort of

1:56like a almost biological approach

1:59thinking about them is like kind of

2:01competition between populations and how

2:04things evolve over

2:06time how we def it for this class though

2:09is a strategy is the coordinated set of

2:12actions that its managers take in order

2:15to outperform the company's competitors

2:18and Achieve Superior profitability I

2:22think this is a fine working definition

2:25that we can use for this class and it

2:29suits our purposes so this is what we'll

2:32be referring to if we ever mention a

2:34company

2:36strategy in developing a strategy you're

2:40often facing these three Central

2:44questions and what strategy often turns

2:47into is it's sort of a process of

2:50hypothesis testing is one way people

2:53think of strategy and I I like that

2:55analogy a lot and the idea is strategies

2:59kind of like hypothesis testing because

3:02what you're doing is you're trying to

3:06one identify what's a problem or what's

3:08a goal you're trying to achieve then

3:11number two you're taking stock of well

3:13what are all of the relevant variables

3:15that we think are related to us and our

3:19ability to achieve this goal and then

3:22number three you come up with okay well

3:24given our goal in the different

3:27variables that we are dealing with

3:30what's a particular plan we could come

3:32up with to achieve that goal and that's

3:35kind of like a hypothesis so then you

3:37put your plan and action you see if it

3:39works if it doesn't then you go back to

3:42the drawing board and try something else

3:45so there's always these three sort of

3:47central questions that you're dealing

3:49with whenever you create a strategy so

3:52number one what is our present situation

3:55these are what are all of the different

3:58variables um at work in the industry

4:02what are our competitive strengths and

4:04weaknesses all of that type of stuff

4:06number

4:07two what is our Direction what are we

4:11trying to achieve what's our performance

4:13targets so that's sort of your goal or

4:15your problem statement if you will and

4:18then number three is what is our plan

4:22for running the firm and achieving good

4:24results your strategy okay that's sort

4:26of your hypothesis so you put that

4:28strategy in place

4:30you see if it helps you to achieve your

4:33goals and performance

4:35targets hopefully it does if it doesn't

4:38then you go back and say okay is there

4:40something we missed in analyzing our

4:42present situation all right or do we

4:46need to re um adjust our goals perhaps

4:49we were a little too optimistic about

4:53what's really is

4:55possible so these are the three

4:58questions that you face When developing

5:01strategies now something that's Central

5:03to strategy is that strategy is all

5:06about making tradeoffs you're making

5:08choices and you're making tradeoffs you

5:10cannot be everything to everyone if you

5:13could then there'd be no point in coming

5:16up with strategies you would just do

5:18everything

5:20right but we cannot do everything so you

5:24have to pick what you want to do you

5:25have to pick which Industries you want

5:27to operate in you have to pick which

5:30customers you want to Target you have to

5:32pick which suppliers you want to work

5:34with which Partners you might want to

5:36partner up with all of these different

5:38choices you have to make all of these

5:40different tradeoffs you're always by

5:42choosing one set of customers you're

5:44ignoring another set all right so these

5:48are all of the different tradeoffs

5:49you're making whenever you engage in

5:52strategy and making the right tradeoffs

5:55is the name of the game here so

5:59something I particularly like about

6:01strategy is that strategy is all about

6:04being different and competing

6:06differently often your differences in

6:08strategy become your strengths what you

6:11want to do in strategy is you want to

6:13find ways to compete against your Rivals

6:17by doing things that they can't do if

6:20you can find ways to do things that they

6:22can't do then you can stake out your own

6:25bit of territory and customers and

6:27segment of market and draw profits from

6:30it all right so you want to find ways to

6:33avoid

6:35competition in most cases all right what

6:38you want to avoid doing

6:41is running head on into established

6:44competitors and getting in price Wars

6:46and things like that so having a good

6:50understanding of strategy not only tells

6:52you what you should do but it also helps

6:54you to understand what you want to avoid

6:58doing too okay

7:00if you play the same strategy as your

7:03competitors then you should expect to do

7:06no better than them all right if we were

7:09to think about an industry where

7:11everybody has access to the same tools

7:14employees and everything else and they

7:16all use the same strategy then there's

7:19no reason to believe that any one of

7:21them would do better than the rest they

7:22should all do similarly

7:26okay now if you want to win in in that

7:29type of a scenario you're going to have

7:31to make some different choices than the

7:34rest of the competition and by making

7:36those different choices it gives you a

7:38chance of outperforming them all right

7:42so hopefully you can figure out some

7:44sort of Novel clever ways to do things

7:47more effective and more efficiently than

7:50the

7:51competition that will hopefully allow

7:54you to stake out a position that's not

7:56crowded already with strong competitors

7:59all right right so you want to compete

8:02differently so that you can distinguish

8:05yourself amongst the competition

8:07hopefully that draws customers to you

8:10and if nothing else hopefully that keeps

8:13you out of the crosshairs of everybody

8:15else all

8:17right so here's a real world example of

8:20what I'm talking about in the early

8:222000s the Oakland A's were this major

8:26league baseball team that was

8:27underfunded and they were performing

8:29poorly they couldn't afford the top

8:32recruits well at the time the

8:36conventional baseball wisdom was you can

8:39pick your top recruits based on having

8:41these expert Scouts that go and Scout

8:43players and they know exactly what to

8:45look for and how to offer these people

8:48big salaries and bring in these top

8:51recruits but essentially you needed to

8:53pay to play all right you need to have a

8:57lot of cash reserves to attract those

8:59top recruits to play for

9:02you

9:03so this is what all the major league

9:06baseball teams were doing and what

9:08happened was if you had a lot of money

9:10you know you

9:13were the New York Yankees or someone who

9:16was flush with cash then you could

9:17attract those top recruits and if you

9:19were the Oakland A's then you

9:23couldn't so the Oakland A's attempted a

9:26new strategy to pick undervalued Rec

9:28recruits

9:30by relying on analytics instead of

9:32experts so they said instead of having

9:34these experts go out and Survey uh

9:37baseball recruits what we'll do is we'll

9:40look at the statistics of each of the

9:43players we'll figure out what statistics

9:45predict um performance in the pros and

9:50we'll make all of our judgments on who

9:53we were to prioritize as a recruit based

9:57on how they Stack Up sta I istically to

10:00one

10:00another at the time nobody else was

10:04doing this and the strategy worked

10:07brilliantly okay they were the only MLB

10:11team using this statistical approach

10:14worked really really good in 2002 they

10:18won 20 games in a row okay which is an

10:22American League

10:23record uh if you do the mathematics and

10:28assume like each game is essentially a

10:30coin flip winning 20 games in a row

10:33comes out to these very astronomical

10:36odds okay very very hard to to win 20

10:39games in a

10:41row and this worked really well for the

10:45Oakland A all right however what

10:48happened is eventually other teams

10:51caught wind of the strategy they

10:52realized oh well instead of using

10:55experts we can just use statistics and

10:57look at different recruits that way

11:00um and there was nothing to stop all of

11:02those other teams from learning the

11:05strategy and then using it themselves

11:08okay the strategy was really easy to

11:11imitate and what happened is

11:13now

11:15um when recruiters go to look at

11:17different players they look at the

11:20statistics behind them people with the

11:22best statistics get the biggest cash

11:24offers to come play for your team and

11:28we're back to one again so this example

11:32shows you how the Oakland A's were using

11:36a new strategy that distinguish

11:38themselves from the competition they

11:40beat the competition for a while but the

11:42problem with their strategy was it was

11:44really easy to imitate okay once you

11:47realize oh they're using statistics

11:50instead of expert Scouts well what

11:53statistics are they using you figure

11:54that out okay well we're going to use

11:56that too and you know now it's back to

12:00pay to playay type of stuff all right

12:02you have to have the big wallet to bring

12:04in the top

12:05recruits a real winning strategy is both

12:09different and hard to copy all right so

12:12when you're coming up with your

12:13strategies think of something that's

12:16both different new novel not what

12:19everybody else is using the oak A's

12:22figure this part out but they didn't

12:24figure out the piece about having

12:26something that's hard to copy that's

12:28also crucial

12:31ultimately your strategy should be

12:35helping you to develop a competitive

12:37advantage and this requires that you're

12:40able to meet the needs of customers

12:42either more effectively you offer them a

12:44better product or more efficiently

12:48you're able to offer them a similar

12:50product but it costs you less to do so

12:53than your competition so there's a

12:54bigger profit margin on it for you all

12:57right now to develop a sustainable

13:01competitive Advantage requires that you

13:03give buyers a lasting reason to prefer

13:06your products or Services over the

13:09competition okay it requires you to

13:12develop some sort of expertise or

13:16capabilities that can't easily be

13:19overcome by the competition as you saw

13:21with

13:22Moneyball they came up with those

13:25expertise um and capabilities but they

13:28were were easily overcome by the

13:30competition when the competition just

13:32figured out what they were doing all

13:34right so you need to develop something

13:37that can't be copied or imitated very

13:40easily all

13:42right and developing this piece that can

13:45give you a sustainable competitive

13:47Advantage needs to be at the center of

13:50crafting your strategy so when you're

13:51thinking about strategies think about

13:54okay one what's one way that we can do

13:57something different from the compet I to

14:00help us to build better products or make

14:03similar products more efficiently and

14:06two how can we do this in such a way

14:11that it's going to keep us ahead of the

14:14competition for the long term something

14:16that can't easily be out imitated or

14:24overcome so here's the five basic

14:27strategies for building competitive

14:29Advantage

14:32okay if you were to sort of look at any

14:36number of companies you can kind of sort

14:37them into these five boxes in terms of

14:40what strategy they use all right sort

14:43of um there's people that sell lowcost

14:47products to a broad group of individuals

14:50okay that kind of Target everybody

14:52there's people who sell lowcost products

14:55but they're targeted toward a specific

14:57Niche then then there's people who sell

15:01high-end or differentiated products to a

15:04broad group and there's others who sell

15:06them to a niche okay and then the last

15:10one is what we would call the best cost

15:12provider and that's somebody who tries

15:14to balance low cost and differentiation

15:18all right um so you know it's a low cost

15:23maybe the product is cheaper than the

15:26than a lot of the competition but

15:27there's some upscale elements so let's

15:29talk about these on this next slide

15:33here so if you want to talk about

15:35lowcost providers examples of them are

15:38like if you've ever gone International

15:41to Europe or somewhere um and flown Ryan

15:44Air that's a lowcost company all right

15:47Southwest here in the states Amazon

15:50Walmart what do all of these companies

15:53do

15:54well they offer products and services

15:58that are sort of targeted toward

15:59everybody okay I mean Amazon calls

16:02itself the everything store which to me

16:05implies that it's for everyone too uh

16:08Walmart they sell a lot of different

16:10things right I mean you can kind of

16:13get almost anything you need on a daily

16:16basis at

16:19Walmart and their strategies are built

16:24around saving or cost cutting building

16:27cost advantages over their Rivals

16:31okay so companies like Ryan a and

16:35Southwest

16:37um they deal with sort of the logistics

16:40of loading planes and everything in a

16:43way that's more efficient than their

16:46Rivals you know trying to figure out

16:48okay how can we pick routes and

16:51everything

16:52where we can you know basically have

16:55planes run out of gas as they land on

16:57the ground so that they didn't have to

16:59carry any extra weight or anything like

17:01that uh how can we make sure the planes

17:04are always up in the air and spend as

17:06very little time on the ground as

17:08possible and come up with really complex

17:11operational strategies for making all of

17:14those things happen Walmart and Amazon

17:16do the same thing in terms of how they

17:18keep their stores stocked and how they

17:20deliver their products and how they deal

17:23with suppliers you know they're such big

17:25buyers that they can kind of bully their

17:27suppliers around and stuff like that

17:32um but all of their strategies are face

17:35are based around cutting cost and

17:38selling their products and services to

17:41the masses

17:43okay now as sort of the opposite of that

17:47you can look at a company that engages

17:50in a strategy of broad differentiation

17:52so examples here something like Mercedes

17:56nean Marcus Apple

18:00these are products that aren't really a

18:02niche you know Mercedes makes all

18:04different types of cars okay um they're

18:08not like Ferrari where they just make

18:10sports cars okay they make SUVs they

18:15make uh sedans all sorts of different

18:19things

18:20um and they're just sort of upscale from

18:24your average car all right uh so it's

18:28just sort of like like an extra nice

18:29version of Volkswagen or whatever if if

18:32you want to think about it that way

18:33they're not targeted toward a specific

18:35type of person same with nean Marcus

18:38they sell all kinds of different clothes

18:40just they sell all kinds of different

18:42sort of high-end expensive clothes all

18:45right

18:47now broad differentiators what they do

18:51is they try to build products in such a

18:54way where customers perceive that these

18:58products are Superior to their Rivals

19:01and are willing to pay a premium for

19:03them okay that's how they make their

19:05profit margin C lowc cost providers make

19:08a profit margin by having lower costs in

19:11the competition broad different or

19:13differentiators make a profit margin by

19:16charging premiums

19:20okay now then you can also play the

19:23niches in either of those strategies so

19:25you can have like a Focus lowc cost

19:27strategy would be a company like Harbor

19:30Freight H&M Dollar Shave Club okay these

19:35are all companies that Target the lowc

19:39cost

19:39segment but you know they're sort of

19:43targeted toward a specific Niche all

19:46right Harbor Freight isn't like Walmart

19:50in that you can go there and

19:54buy groceries

19:57and what back to school supply and all

20:00that kind of stuff too all right Harbor

20:02Freight just sells tools and they're

20:04cheap tools but they it's a low cost but

20:06it's you know the niche of tool sales

20:11H&M you know they sell cheap clothes but

20:15the clothes are sort of geared toward a

20:17specific type of person okay a younger

20:20audience um you know it's not like

20:24they're selling clothes that

20:25[Music]

20:27are I don't know

20:29know targeted toward everybody

20:32necessarily I mean they're clearly meant

20:34for maybe

20:36the 30 and under crowd if I had to guess

20:40Dollar Shave Club you know it's cheap

20:42but they just sell shaving Supply it's

20:45not like a website like Amazon where you

20:47can go there and buy AC units and laser

20:52pointers and computers and all sorts of

20:54other things

20:58um same thing goes with differentiated

21:01strategies okay so there's some

21:02companies that sell high-end stuff but

21:04it's

21:05all in a particular Niche okay Ferrari

21:09is different from Mercedes and that yeah

21:12they both sell upscale cars but Ferrari

21:15only sells sports cars okay

21:18um they don't sell any SUVs or trucks or

21:22off-road vehicles or anything like that

21:25just sports cars Nike Just Sports

21:29clothing nice Sports clothing I mean I

21:31guess they sell a handful of other

21:33things you buy golf clubs and things

21:34like that sports gear we'll say

21:38Pendleton you know wool shirts all right

21:42there's a certain type of person they're

21:44targeted that too

21:47okay so you can get that idea as far as

21:51you know those four approaches and

21:52there's some companies that try to

21:54balance in the

21:55middle all right this is often a hard

21:58strategy to play is the best cost

21:59provider what can happen if you try to

22:02play the best cost provider is you can

22:04get what's called Stuck in the Middle

22:06where people will look at the company

22:07and say well they sell products that

22:11aren't very nice I mean they're nice but

22:13they're not really really nice and they

22:16they're more expensive than the really

22:19cheap stuff um you know so you can

22:22confuse people but there's some

22:23companies that do it really well all

22:26right and they don't get stuck in the

22:27middle okay people usually want sort of

22:30a clear identity but some examples of

22:33companies that play the best cost

22:36provider strategy and do it well you

22:38know and that people like are like

22:40Publix okay so Publix yeah it's more

22:44expensive than a lot of other grocery

22:48stores but it's cheaper than going to

22:51somewhere like Whole Foods or World

22:54Market um and they have an interesting

22:57mix of stuff you know the produce at

23:00Publix is always pretty cool I mean you

23:02know they have a really interesting set

23:04of fruit that you can buy they have the

23:06international Idol aisle which is great

23:09um the staff is always friendly there uh

23:13you know they have a a very wide range

23:16of products and and they have some

23:18high-end stuff um along with um you know

23:23just everyday grocery items

23:25so it's kind of like your in between

23:29Whole Foods and whatever your other

23:33local grocery stores are and um you know

23:37your Walmart Neighborhood Market or

23:39whatever but people like that they do a

23:42good job of playing that role okay

23:44Trader Joe's does something kind of

23:46similar where you know Trader

23:48Joe's offers kind of

23:53interesting novel products okay um I

23:58don't want to say they're super high

23:59quality or anything but they're a lot

24:01more novel than you would find in an

24:03average grocery store and they're able

24:05to do this by you know dealing with

24:09suppliers who might not be able to uh be

24:14as consistent as other grocery stores

24:16would like um they deal with a smaller a

24:20much much smaller uh footprint than a

24:23lot of other grocery stores they take on

24:26less quantity of products which makes it

24:29a little bit less complicated to manage

24:31and saves them cost so you know they're

24:33able to stock their stores with these

24:35novel products and do it at

24:39a really cost competitive rate Chipotle

24:43you know

24:46um they sell burritos and things for

24:50it's more expensive than McDonald's but

24:52it's cheaper than a lot of other sitdown

24:54restaurants and yeah it's pretty good

24:57right

25:02so company strategies need to evolve

25:04over time all right it's important

25:08that whatever you do you're always

25:11keeping in mind that things are going to

25:12change over time

25:15okay um companies can't use the same

25:18strategy and expect that to work forever

25:20and ever all right so like one classic

25:24example is Kodak all right Kodak thought

25:27that film was going to be how he took

25:30pictures forever they developed you know

25:33a digital camera but they thought yeah

25:36you know this is never really going to

25:38catch on all that well people are always

25:40going to be using film um and even

25:44though they were one of the first

25:45companies to develop the div the digital

25:47camera they realized that well we make a

25:49lot of money

25:50from um processing people's film

25:53canisters and stuff like that let's just

25:55keep film as sort of the industry status

25:58quo and they didn't bother working on

26:01that digital technology at all uh what

26:05instead they did is they did some really

26:07crazy stuff like they realized that

26:09silver was a key ingredient for

26:12processing and and making like camera

26:14film and they tried to Corner the market

26:16on camera film on on Silver so that when

26:21they had all the silver supplies they

26:23could be like deers with diamonds and

26:26have like a monopoly on the supply chain

26:28for producing film um really silly stuff

26:33right and just as they were starting to

26:36really lock up a bunch of silver

26:38producers and

26:40everything uh a lot of other companies

26:42Fuji and different other camera

26:46manufacturers

26:47started uh making digital cameras and

26:52Kodak slowly started losing market share

26:55quicker and quicker and quicker and

26:56quicker um

26:58and just dwindling dwindling and

27:00dwindling away until their you know slow

27:03death so you don't want to be like Kodak

27:07all right you need to realize that

27:09there's advancing technology out there

27:12there's changing market conditions uh

27:14there's competitors who might be making

27:16moves buyers might be looking for

27:19something different you know a lot of

27:20people found that you know what

27:23developing film and taking pictures and

27:25having no idea what I just took a

27:26picture of until

27:29a week later when I get the film back

27:31really isn't that convenient and isn't

27:33something I like that much you know

27:36there's all these different things

27:38that weren't what customers were looking

27:42for so you need to make sure that you're

27:45keep staying Vigilant on these emerging

27:48opportunities and looking to sort of

27:50continually improve your strategy and

27:53evolve it as everything changes around

27:57you

27:59so what happens is that strategies are

28:02often this sort of blend of proactive

28:06initiatives and

28:08reactive adjustments

28:11okay so whenever you build a strategy

28:15you often intend to do something and you

28:17have this deliberate strategy

28:20okay but what you find is when you go to

28:24enact your deliberate strategy you had

28:26some assumptions that you realize yeah

28:29these didn't turn to really pan

28:31out and as you start to recognize some

28:35of those assumptions you had you make

28:39some shifts okay you change some things

28:42this is what's called the mergent

28:43strategy okay you do things you would

28:45have never thought of in the planning

28:47stage um and you end up abandoning some

28:50of your elements of your digit of your

28:53uh deliberate

28:55strategy and sort of the blend of

28:58deliberate strategy and emergent

29:00strategy is what we would call the

29:01company's realized

29:05strategy so again strategies are built

29:08out of these sort of you know proactive

29:12deliberate elements also these emergent

29:15reactive elements okay and you end up

29:18abandoning some of the ideas that you

29:20originally thought were um really really

29:24good um that just turned out to not pan

29:26out because you had disr assumption or

29:28whatever so a classic example of this is

29:31like Honda okay there's this sort of

29:35legend that when Honda first started

29:37selling cars in America what

29:40happened is

29:42they came to America in

29:48the late 60s early 70s or

29:52so and they wanted to sell their small

29:57cars um they were building really

30:00well-made small cars that were selling

30:02in Japan super well on their smaller

30:04roads and everything and were good for

30:07that sort of compact City Driving they

30:09had great gas mileage and everything

30:11else and the people at Honda

30:15were probably well informed um they must

30:19have done their research I mean they

30:20build really good cars and are good

30:22engineers and quantitative smart

30:25individuals so they must have done their

30:27homework and looked at the American

30:29market and somehow convinced themselves

30:31that you know America at that time uh

30:36which was sort of the muscle car era in

30:38America was looking for that type of a

30:41product so they opened up these

30:42dealerships in the US and no one wanted

30:46to buy their cars everyone thought they

30:47were like a joke

30:49because at the time in America you could

30:52buy whatever Dodge Challengers and

30:56Imperials and Ford Galaxies and these

31:00you know these big comfy cars uh for

31:05less than the small Honda vehicles okay

31:08um and they were also really big and had

31:11huge engines and everything um and at

31:14the time gas was really cheap in America

31:17too so no one really cared about gas

31:19mileage or anything

31:20else so those original Honda cars didn't

31:24sell very

31:26well and what happened was Honda did

31:29send over a handful of their smaller

31:33motorcycles they're like little CB 350s

31:36and different things like that uh just

31:39to those dealerships and the salesman

31:41would play around with them but they had

31:43no intention to sell the small

31:44motorcycles they they thought they were

31:46just going to sell the cars but what

31:48would happen is people would drive

31:49around they'd pass the Honda dealership

31:52and say oh look at those silly little

31:54cars there no one wants them but then

31:56they would see the motorcycle and say w

31:58that's really cool you know a 350cc

32:01motorcycle that that's kind of

32:03interesting um and they look really

32:06Zippy and like they'd be a lot of fun

32:08because in America all we had were big

32:11cruiser motorcycles Harley-Davidson and

32:13that kind of stuff and maybe there were

32:15some European motorcycles but that's

32:17kind of a different

32:19story so people would say well I'm

32:22really not interested in the car but

32:23that looks like a really fun motorcycle

32:25where can I get those can I get a

32:27motorcycle and we're always asking about

32:29them and those motorcycles are still

32:30cool to this day if you find a CB 350 or

32:33something it's a fun cool collector

32:36bike um and what happened is Honda

32:41started realizing okay maybe the

32:44American Market isn't ready for our cars

32:47but they love our motorcycles so they

32:48started selling motorcycles in the US

32:51and they sold those motorcycles for a

32:53long time eventually the oil crisis

32:56happened the Embargo and gas prices

33:00started to shoot up and then that's when

33:03Honda found that they could start

33:04selling their cars but Honda was

33:06originally known as sort of a motorcycle

33:08company more than they were a car

33:11company in the

33:17US okay so now we're going to change

33:19gears a bit and talk about the company's

33:22strategy and its business model all

33:25right and focus on the business model

33:27portion

33:28more so than the strategy portion so the

33:31business model is sort of how will the

33:35firm make money okay you

33:38know the idea is that you provide

33:41customers with value all right you know

33:43economic transactions only really happen

33:47when both sides perceive that they're

33:49going to come out ahead okay um if a

33:53customer thinks something costs more

33:55than the value they'll d from purchasing

33:59that thing obviously they won't buy it

34:02and you as a uh you know running a

34:06business or a manager you're not going

34:08to sell

34:10something for a price that's less than

34:14the cost unless you're just trying to

34:17unload some stuff and run the company

34:19into the ground or something for various

34:21reasons or you know it's just you got to

34:24move the inventory off your shelf

34:26because it's causing other types of

34:28problems okay but

34:30generally economic Val economic

34:33transactions only occur when both sides

34:35perceived that they're going to come out

34:37ahead

34:39so what you want is you want to give the

34:42customer a value proposition you know

34:44you want to tell them well here's why

34:45you're going to come out ahead by

34:48purchasing this product all right and

34:52you also want to be able to make sure

34:54that you can produce your products in a

34:56way where your Revenue are sufficient to

34:58cover your cost okay and this is where

35:01you get into the profit formula okay so

35:04the idea is if you

35:06can develop a proven business model this

35:09is one that's going to offer you some

35:12profits you know some up you're going to

35:15be able to sell your product at a price

35:17that's greater than the cost and also

35:20that customers will see is offering them

35:23more value than the price okay both

35:25sides come out ahead the economic

35:27transac action uh takes

35:31place so the relationship between the

35:34company's strategy and its business

35:36model as well okay you have your realize

35:39strategy um which is your competitive

35:41ini initiatives your business approaches

35:44the business model is the half of it

35:46that deals with okay well how are you

35:48going to cover your costs what's your

35:51value

35:52proposition those are the questions that

35:54business models deal with

35:59so the customer value proposition is

36:02again you know showing the customer that

36:07you're going to be able to offer them

36:09more value by purchasing the product

36:12than they will have to pay in terms of

36:14the price okay satisfying buyer wants

36:17and needs at a price customers will

36:20consider a good

36:22value so the value provided we'll call

36:25that V and the lower the

36:29price P the more attractive the value

36:32proposition is to the customer okay so

36:35they want high value low

36:39price it's the flip side for you as a

36:42producer well not exactly you want low

36:46cost high

36:48price

36:52okay so the profit formula is

36:58this and it deals with cost structures

37:00that allow for acceptable profits okay

37:04so if we have V representing the value

37:07provided to customers P representing the

37:10price charged to customers and C is the

37:12firm's cost then the cost the lower the

37:17cost for a given consumer value

37:21proposition which is value minus price

37:24the greater ability of the business

37:28model to be a money maker all right so

37:31we can take a look at this might help

37:34you visualize it a little bit better

37:37here um

37:39if what you get your sort of producer

37:43share of the profits is the difference

37:45between the cost and the price

37:50okay every penny that the price is above

37:54the cost that's profits you take home

37:58all right so you can see you have an

38:01incentive to keep your costs as low as

38:03possible because the lower your costs

38:06are then the more profits you make at a

38:10given price

38:13okay now customers will look at this and

38:16say well okay what's the price of this

38:19thing and how much value or enjoyment do

38:23I expect to get out of it all right and

38:26that's sort of their share of the

38:29profits okay value enjoyment those

38:32aren't things that we have quantitative

38:34terms for in terms of like dollars and

38:37cents though so at that point it's kind

38:39of conceptual but you can kind of think

38:42you know when you buy an Apple

38:44for however much you pay for an

38:47apple you're sort of looking at it and

38:50saying well I value eating that Apple

38:53more than I value having the money in my

38:55pocket okay and because there's some

38:59difference between the money in your

39:02pocket and the Apple being of of greater

39:04value to you than the money in your

39:06pocket you make the

39:08transaction so again what you want as a

39:11as a producer is to have as high of a

39:14value proposition as possible because

39:16the higher the value propos the higher

39:19the the customer perceived value okay

39:21the more you can convince them that this

39:23product is of value the higher the price

39:26you can charge

39:27the higher the price you can charge

39:29again it means it's going to be greater

39:32than your cost you make more profits

39:34okay so things you want to control as a

39:38producer is you want the customer value

39:41to be very high you know you want to do

39:44things uh design your products in such a

39:48way that they appear more valuable maybe

39:50create a brand image advertise all of

39:53those different types of tactics that

39:55companies use to make their product seem

39:57more valuable than the competition or

40:00maybe sometimes they are more valuable

40:02objectively well if anything's objective

40:05that is um than the

40:09competition and the other thing you want

40:11to do is control your cost the lower you

40:13can have your cost the more likely you

40:15are to make profits so if you can have a

40:17high customer value and a low cost

40:20you're probably going to have something

40:21that makes decent profits

40:27so first is the fit test and the fit

40:29test deals with you know is this

40:33something that's feasible with the

40:35resources we have in market conditions

40:37okay does it exhibit good fit with in

40:41external and internal aspects of the

40:43firm's Dynamic

40:45situations okay so there are certain

40:48things that you might think would be a

40:51good strategy but they just you know

40:53aren't feasible okay uh you know I mean

40:57if there's ever a company that brings

40:59dinosaurs back that'd be awesome all

41:01right I do just about anything in the

41:03world to see dinosaurs and have

41:04dinosaurs back on the planet but you

41:08know it's a little bit outside of the

41:12grasp of our uh science and may never

41:15really work out because there's no DNA

41:18left despite what Jurassic Park may tell

41:20you um you know it just doesn't fit with

41:24what can actually happen in reality

41:26unfortunately

41:28um you know there's other things

41:31like you know Mercedes might think well

41:34you know if we can lower our costs that

41:36might be a really good idea okay if we

41:38can have really lowcost products then we

41:43could you know increase our profits by

41:46cutting cost a whole bunch maybe we

41:49should start selling you know really

41:51cheap economy cars um but they have to

41:55realize okay well

41:57you know that's going to tarnish your

41:59image the more you dip into that sort of

42:01lowend side of the market okay and the

42:05more you start selling those economy

42:07cars the more people are going to be

42:08kind of looking sideways at your you

42:11know top of the market cars okay your

42:15luxury cars they going to start

42:16questioning them when you start selling

42:18the really cheap economy cars so like

42:21for example that's why

42:23Toyota has Lexus as a spin-off of Toyota

42:26all right you know they're both Toyota

42:29products but Toyota realizes that they

42:32can only charge so much for something

42:34that's branded as a Toyota I mean

42:36granted they make the Supra and Land

42:38Cruiser um which are really awesome high

42:42quality products but uh generally they

42:47realize that they need a different name

42:50if they want to make a luxury car that's

42:52how they got into Lexus as well you know

42:54no one's going to really spend

42:57these high price tags and then be

42:59telling people yeah it's a Toyota you

43:01know they want to have a different name

43:02for it uh they want a Mercedes or BMW or

43:06Audi or whatever can kind of evoke that

43:09and that's what they kind of came to the

43:11conclusion of well we need a different

43:13brand let's use Lexus for the the

43:15premium side of things so you know

43:18there's certain things that companies

43:19might want to do and just realize that

43:21it doesn't really fit with what's uh at

43:26large you know what customer taste are

43:28looking for it's not feasible given

43:30their resources just different

43:33strategies that just get ruled out

43:36okay the next one is the competitive

43:39Advantage test the competitive Advantage

43:41test is okay if we make this decision

43:45are we likely to experience some sort of

43:47competitive Advantage um at least in the

43:51short run but the longer the run is the

43:54more attractive it becomes okay so they

43:57can think all right

43:59well you know if you were a fast food

44:03company and we start selling breakfast

44:07is that going to give us a comp

44:08competitive Advantage well if all of

44:10your competitors are already doing the

44:11same

44:13thing it's just going to give you a

44:15parody you know that doesn't really

44:16distinguish you from them maybe you need

44:19to do that make that decision just to

44:21keep up with the competition but you

44:23know your your strategy of just offering

44:26breakf just in addition to whatever your

44:29current offerings are probably aren't

44:31something that's going to be uh

44:34necessarily a winning strategy all right

44:37you got to look at things like you know

44:39is this going to be different somehow

44:40distinguish us is this a decision that's

44:44likely going to help us charge a premium

44:47or lower our expected costs that's how

44:51you can think of the competitive

44:52Advantage test if you know there's good

44:56reason to believe that it will then well

44:58maybe it's a good

45:00strategy so these first two are kind of

45:03prospective okay they're looking forward

45:06you know does enacting this strategy fit

45:09with the resources we have and the

45:13environment um the last one is the

45:15performance test and this is looking

45:17back on it okay so you now enact the

45:21strategy because it fits the first two

45:24tests now the next piece is okay

45:27are we now actually making Superior

45:30profits uh are we growing our market

45:34share you know is there some sort of

45:37positive outcome

45:39that's occurring as a result of us

45:43making this strategic change okay and

45:46you might have to wait a little while to

45:48see if something happens okay effects

45:51aren't immediate

45:53but if you give that a little bit of

45:56time and nothing happens or you start

45:59doing worse and worse and worse then

46:02well that's probably not a winning

46:03strategy despite your good intentions

46:07based on meeting the fit test and

46:09competitive Advantage test and it's time

46:11to go back to the drawing board really

46:14strategy is kind of like hypothesis

46:16testing okay think about it as sort of

46:18real life hypothesis testing you think

46:21about an idea that you expect would make

46:24money um that seems like a good idea a

46:27for your business does it pass these

46:29first two sort of logical tests you put

46:33it into practice you this is sort of

46:35you're running your experiment and you

46:38see what kind of results you get to get

46:40poor results well your hypothesis was

46:42wrong go back to the drawing board if it

46:45pans out then you think okay well how

46:47can I build on this all right how can I

46:49exploit this test this idea

46:55further so crafting strategy executing

46:58strategy super important of course okay

47:01gives you a prescription for how you

47:03should be doing business going down the

47:06in in the future gives you that sort of

47:08road map all right a game plan for

47:10pleasing customers and

47:12everything um and hopefully a formula

47:15for attaining some sort of longterm

47:18standout performance all right achieving

47:22competitive Advantage suain competitive

47:25so the road ahead

47:27would like to reiterate first that

47:29strategy is about taking risk and also

47:33making tradeoffs figuring out what you

47:36can do differently to set yourself apart

47:39from others in the rest of the

47:40competition and also what you must give

47:43up to do so you can't be everything to

47:45everyone so you have to pick and choose

47:48what you want to do in your

47:50strategy also as we've been discussing

47:53so far strategy is a lot like hypothesis

47:56testing

47:57okay so you first Identify some sort of

48:00challenge okay whether that's a goal to

48:03make profits or to fix some sort of

48:07problem that's going on with your

48:09business plan or whatever identifying

48:12this challenge then you take stock of

48:14all the relevant variables that you

48:16think are affecting this challenge

48:19develop a plan to address the

48:24challenge all right put it into PL

48:26practice

48:27and then analyze your results and see if

48:30you were able

48:32to achieve your goals or not if you were

48:36then you look into how you can further

48:39build upon what you're doing and exploit

48:41it

48:42further if something doesn't work out

48:45you go back to the drawing board and

48:47see what went wrong in your calculations

48:50so strategy is often a fairly creative

48:55and playful endeavor as far as business

48:58goes all right it's often a lot of fun

49:01to think about okay well what are

49:02different things I'd like to do with my

49:04business and how can I plan to achieve

49:07those things um and it's also fun always

49:11to run experiments and test things too

49:14okay so welcome to my class I'm glad to

49:18have you all here and best wishes for

49:20your success thank you