Design Your Day | Focus Hour vs Recharge Break​

Our internal clock determines our optimal focus time during the day. Some people perform best in the morning, others in the afternoon or evening. Find out when you are most and least productive.

• Most productive: During your peak focus hours, work on the most critical tasks that require focus for a long time.
• Least productive: Use low-focus hours for LITs (least important tasks), such as administrative work, responding to emails, and scheduling appointments.

Set up a focus hour to work on one critical task. After an hour, take a short 20 mins recovery break. During the break, STOP processing all information and go for a walk, hydrate, or eat

References​

1. Taking breaks can increase productivity
2. Ultradian Performance Rhythm

Class 1​

• Most of the companies fail not because they are not good at doing what they do, but because what they are doing is something nobody wants.
• 50% of the explanations you encounter in the real world are not really explanations, but mere redescription of question. Call people out for that.
• Average life expectancy of a company in S&P 500 is 12 years. The forces of entropy is coming after you.
• Perfect competition destroys you. If an industry has perfect competition, then all the surplus values goes to consumer and companies doesn't make a lot of profit.
• Best business people are always worried, but never stressed. Confidence without attitude.

Class 2​

• Barrier to entry doesn't have to be high, but it should be hard to immmitate your business model.
• In Finland, if you get traffic ticket, your ticket will be 30% of your income.
• In stores, employees steal the most.
• It is hard for companies to be a mature and startup company at the same time because of mixed culture required.
• When you have to say no, don't just say you no but tell come back when you have.
• IT works in an environment where labor is expensive, but not where you have cheap labor. E.g. Walmart business model never work in China where there is cheap labor.
• Glassdoor's Best Places To Work are in "Pay to Play" business model.
• High Quality is all about perceptions, low cost is all about real costs. Reputation takes miles to attain, but lost soon.
• People who have knowledge work for percentage (%) of revenue, instead of salary.

Class 3​

1. There are very few things in this world where only one entity is involved; otherwise most of the things happen when a lot of people are involved.
   • We just need to block only one entity in the chain.
   • To block a landline from CA to NY, you just need to break 1 mm of cable, and whole thing will break down.
2. If you are replaceable, you will be replaced. You need to add value to be irreplaceable. Think about what value you are adding to your study group, team, or friendship.
3. In life, you don't have to be good at everything. You just need to be good at one thing, and you can be average in all other fields.
4. If you have to pick drive left or right, which one would you pick? The one in which everyone is driving.
5. Wasp and Caterpillar: Wasps lay their eggs inside or on the caterpillar's body. When the wasp larvae hatch, they feed on the caterpillar, eventually killing it.
6. There are two types of entrepreneurs:
   1. One who are interested in maximizing their share of the pie.
   2. Others interested in increasing the size of overall pie.

Class 4​

1. As a strategist, you need to think what outside factors can destroy your company.
2. You want to communicate to your competitors that your Variable Cost is low, so that they don't even think of competing. This is usually done by tricky financial accounting.
3. If you are gonna make other companies rich, make sure you are getting money. For example, HSC before building plants should have reached out to Coke, Pepsi suggesting that if we build these plants then artificial sweener's cost for Coke and Pepsi would be cheaper. They would have signed contracts with penalty before building.
4. 💡 You should always be looking at other job opportunities, otherwise your company will take you for granted. This is the only credible way your company gonna raise your money.
5. Irreversible actions are what counts.
6. ABC - Always be concerned / worried.

Class 5​

1. MBAs are paid top money because of how they can come up with structured solutions to a complex problem. Being able to take insights from one solution to another.
2. Economics - process of making decisions in a world where there are limited resources.
3. Scarcist thing in your life is Time and Attention.
4. Interacting both inside and outside the market is expensive. Ultimately the size of the cost determines the cost of interacting.
5. When you are cutting costs, you are just pushing down your cost to somebody else. If you are not doing it, somebody else is doing it and you'd have to pay them. The only reason you outsource is the job doing by somebody else is better and cheaper.
6. Strategies
   1. Corporate [Horizontal] - Product scope question. Should startbuck coffee also be in tea business?
   2. Business -
   3. Industry [Vertical] - Scope decision. Where would you do business? What activities of value chain will you be doing?
7. MBAs: Always confident, sometimes right.
8. You can predict attrition and toxic people using just the communication data. Similarly you can look at successful product data.
9. There is always more money than ideas in America.

Class 6​

1. There isn't a correct way to look at business problem.
2. If you can't beat your competitor, join them. Either preserve your exclusivity or become interoperable. E.g. When USB-C came out, a lot of existing devices were not compatible. However, companies took a gamble because they knew that with a small adapter people will switch to new devices.
   1. When you are trying to migrate people from one way to another, you need to provide a migration path.
   2. Back in old days, Lotus was super popular. Microsoft built Excel and copied all the Lotus's keyboard shortcuts so that people can easily migrate from Lotus to Excel. Similarly, Microsoft added support of opening Lotus files, making it easy for people to switch.
   3. Incumbent will try to block migration path.
   4. Microsoft created office's Macintosh version so that they can say that they are not monopoly.
3. Can you be flexible and commitment at the same time? No, but that's what you need to figure out.
4. Marriage is a lot like startup. Most startup fail and never make it to IPO. Wedding is like IPO. You are committed to solution to problem. You fall in love with problem but not solution. Persistent, Committed and Flexible.
5. Today's strategy comes out from figuring out how to respond quickly in response to new information.
6. Steve Jobs used to think independent app developers as parasites, while Android adopts it.
7. Platform is when you have distinct kind of customers. Both customers individually have no business but with your platform, a business transaction happens.
   1. Bank has borrowers and depositors - both customers.
   2. Newspaper has advertisers and readers - both customers.
   3. Uber and Lyft has drivers and riders - both customers.
   4. University is a platform. Customers - students, professors, donors, program office, company recruiters.
   5. I don't need to create a product to sell. I can sell other people's products on my platform.

Network Externalities​

Growth Flywheel: The more customer you have -> more feedback you get -> better product -> per unit cost decreases -> leading to more customers

• Positive Feedback
• Increasing Returns
• Network Effects

Similar to growth flywheel, we have death spirals where customers leave the company at a fast rate. For example, when you have bank run, people take money out at faster rate.

Mankind Growth Revolutions​

• Domestic System (Craft Production) - Each person focusing on all phases
  • Putting out system - Breakdown among 4 people, where everyone doing only 1 thing.
    • Factory System - less invontory, less in-progress work, no wagon
      • Industrial Revolution - Technology

Case 1 Apple​

Why Apple was Close to Bankruptcy?​

In 2003, Berkeley had ~50% Apple products, but IT @Berkeley didn't support Apple devices. Apple was the first proponent of BYOD.

Why Apple?​

• Coolness
• Easy To Use
• Design

But they were true back in 90s, when Apple was close to bankruptcy. Apple didn't have good business.

Apple Issues​

1. Apple was advertising that you can do all sort of things that you can not do on PC devices. This was not convincing enough for customers to switch from PC to Apple.
2. Apple tried to hold entirety of value generated by its Mac, but it failed.
3. It was costly to make a new OS ($500,000,000), but because of 97% PC market share, Microsoft was able to recover cost within 60 days. However, for Apple it would have taken 2.5 years.

Apple Recover​

1. Every company is a platform and app. They have to decide how much they want.
   1. Apple launched iPod with Mac, but soon they launched iTunes to PC users so that PC users can join the Apple ecosystem.
2. First iPhone didn't have App store and it was not hugely successful. Only with next iPhone when they opened up App Store to everyone, that Apple grew.

Case 2 Walmart Logistics​

Zara - small batch size, short cycle times allows Zara to get an idea whether a style sells or not, helping it figure out which product to produce more or less. Other companies these days have a lot of data, but their organization is not structured in a way that they can change course fast. If GAP which has cycle time of 7 months, then even if GAP has all the data, they can't do anything with the data. You need to have an organization which can take action based on data.

Random Facts​

8. 4 Sided Market - Instacart has Stores, Shoppers, Products, Customers.

   Traditional View	New View (Platform Companies)
   Customer	Customer
   Supplier	Customer
   Employee	Customer
   Distributor	Customer
   Complementor	Customer
   Lender	Customer
   Government	Customer
   Equity Holder	Customer

9. Ideal HAAS alum is sitting at the intersection of Tech and Business. But, how much tech do you know need to know? Not much

   1. You need to have the ability to learn and get up to speed.
   2. You have to be connector.
   3. A generalist.

10. (Monolith Systems) Appliances	(Individual modules) Modularity
    	Modular Sound systems
    Need to replace the whole system	Can easily replace individual modules
    Distributor	If you have a system with asynchronous life cycles, then modular system makes sense. Similarly, if innovation is happening only in one system, then moduler system makes sense.
    Choice - In monolith you have 4 options to choose from.	If we have 4 manufacturers for a 4 step system then you have a lot of configurations. Similarly, At Chipotle you can have a lot of different types of burritos.

Concepts Applicable in Everyday Life​

1. Efficient Frontier

2. Goldilocks principle - when you have a choice variable that is linear, there is a sweet spot which is just right e.g. soup temperature could be too hot, just right, too cold.

   1. Marginal Analysis - When the marginal benefit drops down marginal cost, you drop the call.
   2. When the average phone call increases, it could be either benefit increased or cost decreased.

3. Information and Decision Rights

   1. Allocation of Decision
      1. As you move decision to central location, cost of wrong decision goes high.
   2. Org Chart

4. Francising Model separates out the decision making so that decisions which are crucial remains central. It works for fast food chain because sitting in central office, you don't have knowledge that people at periphery have.

5. We want people to talk to their group and not talk to people from other group.

D&Q Fast Food Francisee Chain​

Why Starbucks own their Stores?​

Why they didn't go franchisee model? Because Starbucks came in 1990s, they had access to more data about customer preferences. With Internet information travels faster. Also, people are driving more.

General Moters and Fisher Body​

GM outsourced body making to Fisher. This model has problems because anytime you change an order, you need to update the contract. To resolve this, it's better to merge these two companies.

Case Disney​

Why Disney does not Outsource their Resorts to Marriott?​

Because Disney is in story business and their story narrative keep on changing and evolving. Their resorts have a story line and if in an year a story flops then they need to change their story of resorts faster. If you outsource resorts to Marriott, you can't execute it this fast as storyline is hard to put in contract.
Moreover, How would you monitor Marriott's employees are delivering the experience that Disney wants from its resort? It's super hard.

What led to Significant Increase in Disney's Yearly Revenue?​

1. In 1980s, the increased ticket price and park's capacity. Open on Sunday.
2. Started yearly release cycle of Disney movies and they just didn't launch a moview, the milked the whole story by merchandises, resorts.
3. Once they ran out of their stories, they started acquiring other companies so that they had newer stories.
4. Once you are super big, you need to have super good accountants so that you can easily see which departments are doing well vs which are not.

Case BMG​

Background​

1. 4 Big players in music industry. Why?
   1. High - Barriers to entry
   2. Economies of Scale. Big companies

Artist
│
├── BMG
    └── Records
    │
    └── iHeart Radio

Game theory is the study of how people behave in strategic situations. If you know what your competitor will do, you can continue doing what you are doing. However, when you don't know others' strategies, your action depends on how others might respond to that action. That's a strategic decision.

There are 5 common games:

1. Prisoner's Dilemma
2. Stag and Hare
3. Hawk and Dove
4. Battle of the Sexes
5. Chicken

In all games, the system eventually settles at Nash Equilibrium, a stable combination of strategies.

Game Type 1 - Prisoner's Dilemma​

• Applications - When multiple parties share common resources e.g. Oil Well.
• Outcome - Two individuals might not cooperate, even if it is in their best interest to do so.
• Dilemma - The conflict between individual rationality and collective rationality. Each prisoner is tempted to betray the other to minimize their own sentence, but if both prisoners betray, they both end up with a worse outcome than if they had both cooperated. Best collective outcome is achieved by cooperation. However, individuals are incentivized to defect. Because of trust issues, a suboptimal outcome is likely in such situations.
• Strategy - If there are finite number of plays, then pick your dominant strategy. However, if there are infinite number of plays, then cooperate with your competitor. ⚠️ To prevent companies from cooperating, we have anti-trust laws.

PD Example 1 - Iran vs Iraq Oil Production Dilemma​

Both countries produce oil, but if both produce a lot of oil, oil prices go down.

• There is one equilibrium, both parties choose their dominant strategy.
• #4 is good for society because more wealth ($100 bn.) is created
• For countries, it makes sense to take #1 (dominant strategy) because you can't trust competitor. Thus,

PD Other Examples - Anywhere There is Common Resource​

1. As a land owner, you get ownership of land till core. As Oil companies own oil wells, it makes sense to over-invest and produce as much oil as possible. If you don't, then your competitor will over-invest and take your oil share, as you can't stop them from pumping your oil.

2. When you go out with your friends and split the check, Order more as your friends will likely do so, and you will pay their share.

3. Biologist approach. Imagine the world is a mix of Cooperators and Defectors. In equilibrium, there will be no cooperators because, in multiple rounds, there will be one defector, and going forward, cooperators will switch to defectors as well.
   If there are a finite number of plays, then there is no benefit to being a cooperator.
   However, if there is an unlimited number of plays, then there is a benefit to being a cooperator. For example, Amex won't give you a credit card if you come with a fixed lifeline.

4. McDonald's doesn't hire employees from the neighborhood where their store is located because that increases the risk of free food. Cooperation emerges when you run into similar people every day. The solution is to rotate troops so that people can avoid establishing relationships.

5. When brushing your teeth, you rearrange bacteria in your mouth, ensuring that bacteria don't build relationships and establish a company.

Practical Resolution - Build Trust, Mergers, Gov Regulations​

When you can't trust your competitor but both parties want to cooperate, you establish a trust so that if anyone breaks the trust, there will be a penalty. For example, Texas and Oklahoma have union trust. California doesn't have this law because California's oil is different - it is more solid, unlike Texas's liquid oil. You can only suck your oil, so you don't need such trust.

Questions​

1. Why don't two countries sign a contract?
   • Companies can't sign a contract because that would be against anti-trust laws.
   • Countries can't sign a contract because the law can't be enforced across borders.

Game Type 2 - Stag and Hare​

Two hunters (players) must decide whether to hunt for a stag (a large and valuable animal) or a hare (a smaller and less valuable animal). Successfully hunting a stag requires cooperation between the two hunters. However, hunting a hare can be done individually and is a safer, though less rewarding, option.

In this there are two equilibriums - Stag + Stag (better), Hare + Hare, but one is better than other. In such examples, whatever the world starts with becomes norm. Thus, if the world has 51% hunters (stag + stag) then eventually equilibrium will reach at all hunters 100% (stag + stag). In business it's called First Movers.

There is advantage if you are a first mover as you can set your own rules and world will follow because of network effects. When intel established their open standard everyone followed their suit, leaving rest of the competitor bankrupt.

• Positive feedback loop - Rich gets richer, Poor gets poorer.
• Network effects - D-Box chair and movie theatres.

Case 1 Ready-to-eat (RTE) Breakfast Cereal​

In 1993, Cereal industry was highly profitable. To analyze an industry, start from porter's five forces framework to understand why it is highly profitable. Whenever you have two big players in the market, there are two main risks.

Assorted Concepts​

The margins of the big three cereal makers are shrinking because of private labels. There is pressure to increase profitability. Kellogs and General Mills are not competing on prices but promotions/advertisement.

Operating Income = Revenue ⬇️ - COGS - SGA (includes marketing) ⬆️

A decrease in prices or an increase in marketing expenses has the same practical effect. If a company is increasing its marketing expense, then its competitor has to also increase their marketing expense.

How Competitors are Attempting to Kill Private Label Cereals​

For competitors to kill private labels, they need to find the weakest link in the value chain and kill that.

• Customer | ✅
• Retailers | ✅
• Wholesalers | ✅
• Distributers | ✅
• Manufacturers | ✅

Targeted Retaliation: Weakest link in the private label value chain is manufacturers, as their margin is only $0.05 per box. So big companies started to cut down prices a bit, which pushed down prices of private label cereals, cutting down manufacturers. Moreover, big cereal makers only cut prices on brands that are imitated by private labels.

It's is an example of a prisoner's dilemma. What if General Mills implements this and Kellogg's doesn't? Kellogg's will take most of the profit. Thus, if one company decide to do it, they will hold a press conference and soon enough the competitor will do the same actions. Since it's a long term game, it makes sense for companies to cooperate, instead of defecting.

As big players stopped paying money to Safeway for shelf space and private label manufacturers margin dwindling, Safeway started approching small brands such as Post, Quaker oats for shelf space bidding. Consequently, there market share increased. These are called Free Riders.

Concept Value Net Model - FRENEMY (Friend + Enemy)​

Cooperation and competition between organizations are not only desirable but also necessary when doing business.

Customers | Competitors | Suppliers | Complementors

All of these entities are not your enemies but FRENEMY. Apple and Samsung, you and your spouse; and you and your housemates.

• Value Creation: Value is created by establishing a standand. Once it's established, then you are locked in, and you don't need to worry about takeoff. Open Source Standards increase the size of the pie. For example, speaking same language increases value. Most standards emerge bottom-up, not top-down.

  • 

  • Adoption dynamics of a new product: Launch ➡️ Takeoff ➡️ Saturation.

  • Typewriters - why do we have a querty keyboard? It was not designed to be fast or have fewer errors, but because they didn't jam. Now, we no longer have this limitation, but we are locked in with this standard. We can't ship to new standards because who is going to create hardware and software for the new standard?

Case 2 Intel vs IBM - Value Capture Strategy​

Intel History​

• Intel is good at R&D, but they can't copyright their RAM drives, so they can't make money. They were in patent pooling industry.
• Intel introduced new designs frequently, and there were 6-9 months of delay when competitors introduced new designs. Intel had this time window to recoup its R&D cost. After nine months, competitors introduced cheaper rams by copying Intel's design. The only option Intel had was to introduce a new design. As time went by, Japanese companies got smarter, and the time to copy was reduced.
• They finally withdrew from the RAM business and planned to create a new business where they could have intellectual property.
• Similar thing is happening with fast fashion industry these days such as H&M.

Case Background​

1. Intel's Innovation: developed the 8088 microprocessor in 1970s, making it more affordable to implement in PCs.
2. IBM's Entry into PCs: IBM decided to enter the burgeoning personal computer (PC) market. They needed a reliable processor for their IBM PC and chose Intel.

Value Capture Dynamics​

Intel's Position:

• Innovator and sole supplier of 8088: Strong position. The success of the IBM PC meant a high demand for the 8088, directly benefiting Intel.
• Brand Recognition: Intel's association with IBM, a leader in computing, boosted Intel's brand recognition.

IBM's Strategy:

• Open Architecture: IBM's PC was designed with an open architecture, meaning that other companies could produce compatible hardware. While this strategy helped IBM quickly capture market share, it also allowed other companies to produce IBM-compatible PCs.
• Focus on Market Penetration: IBM's primary goal was to dominate the PC market. They were less concerned with controlling the entire value chain (like microprocessor manufacturing) and more focused on establishing the IBM PC as a standard.

Outcome and Implications​

• Intel's Success: Intel successfully captured significant value from its 8088 microprocessor. IBM's PCs and IBM-compatible PCs drove large-scale production and sales for Intel.
• IBM's Mixed Results: While IBM did succeed in making the IBM PC a market standard, their open architecture approach eventually led to intense competition. Companies like Compaq began producing IBM-compatible PCs, often at lower prices.
• Rise of the PC Clones: The open architecture of the IBM PC led to the rise of "PC clones," which eroded IBM's market share.

Product Differentiation

• Horizontal - Toyota vs Nissan, Peets vs Starbucks, Chocolate vs Vanilla
• Vertical - BMW vs Toyota

Walmart Case (Low Cost, Still Profit)​

Industry - Discount Retail Stores
Walmart is a Mom & Pop shop killer.

Consumer Psychology​

• At Walmart, there was an effort to clean up shelves and make store cleaner, but sales went down. As consumer thought that the store is no longer cheap.
• Survivorship Bias While looking at data of top companies ROE, you are only looking at firms which survived. The list could be long of people who didn't make it.

Side Questions​

1. Does Management Consulting Really Work?

   • In India, they studied textile industry where some companies had management consultant, while others didn't. They found out that companies with consultant did way better than the rest. Though their
     • But why don't you just copy the strategy of champion?
       • In US, successful companies just grow and grow, and unsuccessful gets wiped out soooner. It doesn't happen in India - because in India you don't hire strangers. You only hire relatives.
       • Prof Notes - it's hard to copy strategy of successful companies.

2. Why COGS of Walmart is higher than Industry standard?

   • Having a higher COGS in % term can be higher even when you are selling at low prices.

3. Can Walmart copy the what worked for them in East coast in West cost market?

   • In East coast, walmart displaced mom & pop shop. However at that time West coast their competitors were Kmart and Target, so they can not just copy paste their model. Similarly, Michael Jordan tried to do what worked for BasketBall to BaseBall good but it didn't work.

4. Topologist studies shapes based on how many holes do you have. For example donut and coffee cup has same number of holes.

5. Cannibalization is not good but it is good if somebody else going to eat your lunch.

6. Should Walmart go to product industry?

   • Berkeley Bowl has a lot of produce and they source from mom and pop suppliers
   • When Walmart came to produce market, they required selected suppliers, who can provide multiple produce instead of just one vegetable. Walmart has all vegetables packed

7. How can Walmart compete with Amazon?

   • Walmart started offering buy online and store pick up. To compete, Amazon bought whole foods.

Companies Story​

Honda​

After war, Japan was torned down and the only way people have electicity is by Honda portable generators. Honda is good with motors, so instead of becoming a power utility company they realized their speciality is in motors. They went on adding wheels.

Typewriter - Olivetti (US) | Remington (Italy)​

In 1980s they were leader in typewriter business. Remington used to be biggest producers for guns before civil war. After war they pivoted to typewriter and now they in Razor business.

Microplane​

Microplane made tools for fine wood working. They had very loyal brand recognition in carpentry space.

• What else can you do?
  • External View -
    • Example - Microsoft going from an on-prem company to cloud company.
  • Internal View - Company realizing what I am good at and going to a different industry.
    • Why limit to wood working, they went to food tools industry e.g. cheese graters.

Gillette - Flexibility​

Gillette is in high margin business, 60%. If you are Gillette, who should you be worried about?

• Putting blade in plastic is the hardest part. So, companies in plastic business are your competitors. For example, Big makes plastic pen so they are big competitor.
• Big launches a new razor. What should Gillette do?
  • Price war - Big launches a cheaper razor
  • Product differentiation - Big comes with 2 blade razor, Gillette launches 3 blade razor and charge higher prices. ❌ Not good because this way you are giving away 2 blade market to big. Soon Big will compete in 3 blade razor market.
  • Gillette launches new cheap pens called PaperMate - the Big main profit generation company. Later, Big retreated the razor market. Takeaway - If you have particular skillset and have great margin e.g. 60%, still a competitor can come with higher cost and eat your lunch.

Harley Davidson​

You can put Harley Davidson logo on anything and sell at premium.

Cola Wars - Coca-Cola vs Pepsi

In old days, there was a pill clinical study trial

Brand is a big thing.

Questions​

1. What is Coca Cola brand worth? How do you calculate?

   • How much prices you can jack up with putting a logo on a product. Multiply that by your projected sales volume to get brand worth.

2. Why didn't Coca Cola used third party bottlers instead of building their own?

   • Bottlers had an expertise in marketing and distribution, which Coca Cola lacked. In 1980s, bottlers knew where to place ads and product. Coca Cola also has to build brand reputation because that time people didn't know about the market. It's a way of identifying who has skills.

Coca Cola Challenges​

Comments​

1. Because of Coca Cola and Pepsi war, all other cola companies went out of business.
2. Whole world is becoming Walmartify.
3. Bottlers had distinct boundary

Porter's Five Forces: Barriers to Entry​

It is a model that helps determine an industry's weaknesses and strengths. It helps to assess where power lies.

1. Competitive Rivalry Solutions​

Companies Coordination Examples

1. Back in old days, NewYork Central and Pennsylvania Railroad Company were competitors and started building out alternate routes for connecting Midwest to East coast. However, Chase, holding significant shares in both companies, came in between and made Pennsylvania Railroad Company drop the plan to build rail lines as it would have led to price war.

   It's illegal for two competitors to plan such actions, but someone having significant stakes in both companies can do so. You can't talk horizontally, but you can vertically.

   

2. There used to be 7 big oil companies that controlled the whole oil production and distribution in the world. If you are oil extractor then you had to work with one of these 7 companies to sell your oil. An example of tacit collusion - firms coordinate their actions without explicitly communicating. Libya revolted this and stopped selling oil to these companies. Around the same time, there were new entrants in the oil industry, who were looking for oil. Libya partnered with them and this eventually led to end of long standing coordination.

   As long as you control one key link in value chain, you can be monopolist.

   Back in 90s there were 12 airlines and only 3 had computer reservation system. There was a huge competition in airlines but only 3 with computer reservation system survived.

High Switching Cost Examples

1. Apple and Google make customers perceive that it is very easy to switch-in to their product, but super hard to switch-out. It doesn't matter what's reality as long as customer perceive it as high switching cost. That's why Google photos was created so that iPhone customers can easily switch to android.

2. When Google docs came out as a free alternative to paid Microsoft Word, Microsoft made it super hard to export documents to Google docs. Microsoft did it by releasing security patches and made it harder.

3. HP printers are cheap, but cartridges are expensive. On the other hand, Brother printers are expensive but cartridges are cheap. Both companies make sure that their cartridges are not compatible with each other. Once you have bought printer, you are locked in.

4. Enterprise software is super hard to switch. Companies delibrately make it harder for companies to switch.

5. Data migration from AWS to Google Cloud is super hard.

Product Differentiation and Positioning Examples

A firm that can position itself strategically to get significant high returns has a "competitive advantage".

1. Find Economic value to the customer (EVC), which is the maximum amount a customer should be willing to pay, using the reference value and differentiation value. EVC = Reference Value (price of perceived closest sustitute) + Differentiation Value.
2. A price needs a context. Without context, a customer cannot evaluate a price.

For example, coffee beans used to be $10 per pound, but now they are almost $50 per pound. When companies started selling K-cups or nespresso shots, they didn't position these shots next to coffee beans but the actual coffee, which costs $5 per cup. All of sudden, $1 for a shot start to look cheaper. How you position your product matters.

Horizontal Product Differentiation Using Preference Maps

• It highlights how a company's product is differentiated from its competitors in the eyes of consumers.
• Companies use these to strategically position their products in a way that appeals to specific consumer segments.
• Useful in product development by highlighting attributes that are most important to consumers.

If you are looking to start a new car company where would you place in perception map?

• Avoid Completely Empty Areas - It might be empty because there's no demand or too challenging or unprofitable to serve.
• Avoid Highly Saturated Markets - Intense Competition will lead to price wars, high marketing costs, and the need for significant differentiation to capture market share.
• Targeting Niche Segments - Look for segments that are underserved and meets emerging market needs.

Case - Airline Industry in 1980s​

Background​

Airline industry was regulated to put a floor on prices.

Why deregulate?​

• People worried about monopoly, price gouging, only one airline traveling certain routes.
• Why prices are fixed, companies don't really compete and there is a waste of resources.

Industry Segments​

1. Trunks​

2. Regionals​

3. Local Point to Point​

Feeders to trunks.

Industry Analysis​

• Overstretching of segments

  • Local started to stretch into regional
  • Regional started to stretch into trunk
  • Trunk has nowhere to go as international market was still regulated

• Everyone saw profits and there were a lot of new entrants, leading to price plummet.

  • Excess capacity led everyone to bankruptcy.

How to bring back profitability?​

1. Change business model to Hub and Spoke
   1. Even if you can predict average demand for a route, there will be volatility. Either your planes would go half empty or you need to say no to customers
   2. Using Hub and Spoke model you pool variability and overall operation becomes efficient. Pooling reduces standard deviation of demand.
2. Innovate by adding Consumer Reservation Systems and dynamic pricing.
   1. Price discriminate over time (last minute booking at high price), method of purchase (online, travel agent, in-person), and class (Economy, Basic Economy)
   2. This enabled revenue management leading to maximize area under demand curve.
   3. You manage short term variability using dynamic pricing. If you have limited seats left, increase price.
   4. 
3. Capture Customers using Loyalty Scheme like credit card
4. Barriers to Entry were not as high as it seemed.

How Tesla Overcame the Barriers to Entry?​

• Brand - launched Roadster as advertisement.
• Plants - bought factory at discount.
• Suppliers - ev car was simple to make, requiring less suppliers.
• Capabilities - leverage existing companies and have slow learning curve.
• Distribution - own sales network so no reliance of anyone else.

This post covers key learnings from a strategy class by Prof. Greg LaBlanc, organizer of unSILOed podcast.

What is Strategy?​

Strategy is not about goal formation and goal accomplishment. Instead, it is about achieving a goal when other goal-seeking agents exist, whose goals may align or conflict with yours.

When Do You Need a Strategy?​

Strategy is essential in war, sports, and business.

Characteristics of Strategic Decision-Making​

To be someone who makes strategic decision for a large organization, you need to be comfortable with complexity, opacity, and uncertainity aka Fog of War. If it's an easy problem to solve, then there are thousands of people who can solve. Only way to be competitive is by tackling something that's C-O-U.

• If you wait for certainty before making decisions, you will likely lose by being the last mover.
• In data-driven decision-making, waiting for a p-value < 0.05 (high certainty) is impractical in business.

Engineering vs. Strategy Mindset​

Business is one of the most complex fields.

• Optimal Performance requires strong operations, whereas Sustained Performance requires good strategy.
• Strategy is dynamic and forward-looking.
• Best practices cannot be applied in isolation; companies play multiple strategic games simultaneously. For example, Apple competes or collaborates with Google, Samsung, Facebook, Foxconn, and Broadcom.
• A company’s payoff depends on the actions of other players.

The Role of a Strategist​

A good strategist should:

• Become the world's best generalist (integrator), as experts can be hired for specific skills.
• Delegate as much as possible.

Value Creation and Capture​

A firm’s true performance is measured as:
Revenue - Cost - Return on Market Value of Equity = Value Created by the Company

Most companies only capture a fraction of the value they create.

To increase profitability, a company can:

1. Decrease costs
2. Increase customer willingness to pay
3. Increase volume while maintaining per-unit value

Potential Industry Earnings (PIE)​

PIE = Value of industry output - Value of resources used to produce output PIE represents the upper limit on industry profits.

Factors Influencing Industry Profitability​

1. Substitutes (bad ❌) vs. Complements (good ✅)
   • Litmus test:
     • If a product benefits you, it is a substitute.
     • If the price of one product decreases and the other’s price also drops, they are substitutes.
   • Examples:
     • Tea and Coffee are substitutes—if coffee prices rise, tea consumption increases.
     • Software and Hardware are complementary—GenAI software increases the value of GPUs.
2. Supplier Bargaining Power (Weak is better)
   • Example: Intel maintained very little bargaining power for its suppliers.
3. Buyer Bargaining Power (High is better)
   • Examples:
     • Emirates has significant customer demand, enabling strong bargaining power with Airbus and Boeing.
     • Walmart negotiates strongly with suppliers, but major brands like P&G also hold bargaining power.
4. Barriers to Entry
   • Examples: Legal constraints, trade secrets.

Impact of Economies of Scale​

Case Analysis: Beer Industry​

1. Industry Structure: Concentrated vs. Competitive vs. Fragmented?​

• The beer industry is concentrated (few big players dominate).
• Economies of scale play a role—higher volume leads to lower per-unit costs.
• Companies transition from fragmented to concentrated as they grow.

2. Why Do Incumbent Beer Companies Grow Bigger?​

• Change must be explained by change.
• Increase in average demand alone does not drive increased company output.
• Example:
  • 1950s TV entertainment increased demand for bottled beer, impacting industry structure.

3. Why Did Coors Have Higher Profits Than Competitors?​

• Lower costs due to a well-optimized value chain:
  1. Product Portfolio - Complementary product selection.
  2. Procurement - Efficient sourcing.
  3. Manufacturing - Operating at minimum efficient scale, ensuring high capacity utilization.
  4. Packaging & Distribution - Owning distribution improves quality control and minimizes losses.
  5. Sales & Marketing - Monopoly players require less advertising.

Key Takeaways​

• Strategy is essential when facing competitive agents.
• Strategic thinking requires comfort with uncertainty and complexity.
• Sustained business success requires dynamic, forward-looking strategy.
• Profitability comes from cost efficiency, increasing customer willingness to pay, or scaling volume.
• Industries with economies of scale tend to concentrate over time.
• Competitive advantage comes from an optimized value chain.