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RICHARD SCHMALENSEE:
So today what

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00:00:27,707 --> 00:00:29,290
we're going to talk
about, we're going

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00:00:29,290 --> 00:00:34,240
to move from the
descriptive discussions

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00:00:34,240 --> 00:00:37,030
of organizational
decision-making

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00:00:37,030 --> 00:00:39,430
to a couple of prescriptive
sessions, which

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00:00:39,430 --> 00:00:43,730
is if you're running an energy
business, how do you do it?

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One of the things,
as this indicates

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that we talked
about you should do,

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00:00:47,500 --> 00:00:49,630
you should be doing
present value analysis,

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00:00:49,630 --> 00:00:53,440
net present value analysis
of investment opportunities.

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00:00:53,440 --> 00:00:55,470
But that's not strategy.

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00:00:55,470 --> 00:00:57,430
So today and next
time, we're going

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00:00:57,430 --> 00:01:00,070
to be talking about strategy.

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00:01:00,070 --> 00:01:03,580
We'll talk about industry
attractiveness briefly,

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kinds of strategies and niches
within industries, and then

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00:01:07,270 --> 00:01:09,700
the Husky case.

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00:01:09,700 --> 00:01:13,990
Wednesday, Don Lessard's going
to be here and explore with you

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00:01:13,990 --> 00:01:19,340
business models, particularly
in innovative segments.

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00:01:19,340 --> 00:01:23,740
So project by project, net
present value isn't strategy.

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00:01:23,740 --> 00:01:29,510
If a firm accepts every proposal
with a net present value,

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00:01:29,510 --> 00:01:31,840
a positive net present
value, the result

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00:01:31,840 --> 00:01:36,460
is likely to be very
incoherent and unmanageable.

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00:01:36,460 --> 00:01:43,300
The Brealey piece is sort of
a finance person's skepticism.

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The first thing you
note is you only

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00:01:45,490 --> 00:01:49,450
see proposals with
positive net present value.

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00:01:49,450 --> 00:01:51,430
If someone likes a
project, it turns out

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00:01:51,430 --> 00:01:53,110
it has a positive
net present value.

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00:01:55,650 --> 00:02:00,060
So what they propose, and
we'll explore a little bit,

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00:02:00,060 --> 00:02:06,180
is thinking about disequilibria,
thinking about will it last.

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00:02:06,180 --> 00:02:08,430
It has a net present
value because we're

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cheaper than they are.

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00:02:09,600 --> 00:02:12,180
OK, why are we
cheaper than they are?

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We can buy materials
more cheaply than they.

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00:02:14,340 --> 00:02:14,970
Why?

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00:02:14,970 --> 00:02:15,960
Will it last?

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00:02:15,960 --> 00:02:17,520
Will it last?

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00:02:17,520 --> 00:02:21,660
Annika and I saw,
before vacation,

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00:02:21,660 --> 00:02:24,900
a very detailed analysis
of US versus Chinese

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00:02:24,900 --> 00:02:27,510
photovoltaic
manufacturing costs.

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00:02:27,510 --> 00:02:29,400
It concluded that the
big Chinese advantage

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was they could get materials
and supplies 25% cheaper.

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00:02:33,210 --> 00:02:36,090
And the first question is, why?

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Is that going to last?

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00:02:37,827 --> 00:02:39,660
The people who'd done
the study hadn't quite

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inquired into that, and said it
was superior bargaining power.

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Superior bargaining
power doesn't last.

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So first point in the
Brealey et al. piece

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is skepticism about
present value.

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00:02:54,180 --> 00:02:57,570
Porter's paper is in
a way more profound,

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00:02:57,570 --> 00:03:01,020
and really does
deserve a serious read.

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Strategy is what you won't do.

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What is it you won't
do as a company?

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Someone walks in the
door with a project

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with a positive
net present value.

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When do you just say,
no, you're right,

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that's a positive
net present value.

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We're not going to do it.

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The argument is this--

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if you're doing the same thing
your competitors are, and there

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are a bunch of them,
you're in a wonderful world

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of perfect competition.

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We all enjoy that.

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It's in the textbooks.

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It's easy to analyze.

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And it's no fun.

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You don't make any money,
particularly if there

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are opportunities to innovate.

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You have to innovate just to
cover your cost of capital.

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There's a little quote
from Warren Buffett, which

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I think still holds true, that
since the dawn of aviation

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the total profits earned by
airlines adds up to zero.

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Airlines have gotten
enormously more efficient.

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00:04:02,080 --> 00:04:04,830
They've done enormous
things for transportation

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for the country as
a whole, but they

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haven't made any money,
because mostly they're

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all doing the same thing.

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And there are a bunch of them.

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And there's no
differentiation or stickiness.

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So the first lesson
is, if you're

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running a company you
don't want to be there.

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00:04:25,710 --> 00:04:29,010
As Porter points out, if
you're in that situation--

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00:04:29,010 --> 00:04:31,230
I mean, airlines have
improved efficiency enormously

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00:04:31,230 --> 00:04:32,370
over the years.

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Fuel costs are down.

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00:04:33,570 --> 00:04:35,790
Electronic reservation
systems, baggage

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handling-- much more efficient
than they used to be,

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and they're still
not making any money

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00:04:39,750 --> 00:04:42,250
because they're all doing it.

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00:04:42,250 --> 00:04:44,790
And if you don't innovate
and improve, you lose.

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00:04:44,790 --> 00:04:45,752
Andrew?

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00:04:45,752 --> 00:04:47,110
AUDIENCE: I was just--

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00:04:47,110 --> 00:04:49,210
RICHARD SCHMALENSEE: Just
drying your nail polish?

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00:04:49,210 --> 00:04:51,760
OK, good.

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00:04:51,760 --> 00:04:54,610
It's important to have it dry.

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00:04:54,610 --> 00:05:00,810
So lesson one is you
don't want to do that.

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00:05:00,810 --> 00:05:03,900
Lesson two is sort of the
obvious counterpoint, which

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00:05:03,900 --> 00:05:06,000
is when you set up
a business, you'd

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00:05:06,000 --> 00:05:09,990
like to be doing something
that's of value to somebody

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00:05:09,990 --> 00:05:12,690
that can't be easily imitated.

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00:05:12,690 --> 00:05:16,060
The buzzword is
"sustainable advantage."

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00:05:16,060 --> 00:05:19,770
So the notion that Chinese
photovoltaics will always

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00:05:19,770 --> 00:05:22,740
be cheaper because
Chinese bargaining power

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00:05:22,740 --> 00:05:27,000
enables them to get silicon
25% cheaper than US firms--

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00:05:27,000 --> 00:05:28,920
that doesn't wash.

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00:05:28,920 --> 00:05:32,320
If that's what's going on,
that's not sustainable.

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00:05:32,320 --> 00:05:35,400
If there is some cost advantage
in silicon production,

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00:05:35,400 --> 00:05:36,570
that's more interesting.

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00:05:36,570 --> 00:05:39,030
But if all you know
is it's cheaper,

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00:05:39,030 --> 00:05:44,170
and all you hear is "bargaining
power," that's not sustainable.

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00:05:44,170 --> 00:05:47,640
So if strategy is
what you don't do,

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00:05:47,640 --> 00:05:50,640
and it needs to be something
that can't easily be imitated,

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00:05:50,640 --> 00:05:53,250
how about the question
I posed there--

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does MIT have a strategy?

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If so, what is it?

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Or what are elements of it?

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00:06:03,020 --> 00:06:03,875
Yeah.

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00:06:03,875 --> 00:06:05,180
AUDIENCE: Hands-on learning.

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00:06:05,180 --> 00:06:06,980
RICHARD SCHMALENSEE:
Hands-on learning.

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00:06:06,980 --> 00:06:08,270
OK, what does that rule out?

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00:06:11,000 --> 00:06:14,702
It's an element of what
MIT is about, absolutely.

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00:06:14,702 --> 00:06:19,750
AUDIENCE: [INAUDIBLE] You have
to limit the amount of people

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that you let in,
because you can't

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00:06:21,530 --> 00:06:24,400
have 50,000 people [INAUDIBLE].

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RICHARD SCHMALENSEE: OK.

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00:06:25,450 --> 00:06:28,280
So it's a high cost strategy.

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What does it say about the
kinds of things you teach?

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Medical school has
hands-on learning.

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00:06:34,877 --> 00:06:36,460
And MIT doesn't have
a medical school.

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00:06:41,940 --> 00:06:45,090
Simpler question-- Caroline,
what's Wellesley's strategy?

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00:06:45,090 --> 00:06:48,120
Does Wellesley have a strategy?

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00:06:48,120 --> 00:06:49,830
AUDIENCE: Yeah,
to educate women.

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00:06:49,830 --> 00:06:52,050
RICHARD SCHMALENSEE:
Educate women in everything?

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00:06:52,050 --> 00:06:55,230
Does Wellesley have a
big engineering school?

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00:06:55,230 --> 00:06:58,920
Liberal arts-- focuses on
women, focuses on liberal arts,

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00:06:58,920 --> 00:07:03,540
doesn't offer graduate
degrees, stay small.

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00:07:03,540 --> 00:07:05,510
That's pretty easy.

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What about MIT?

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00:07:06,500 --> 00:07:08,780
It's more than just
hands-on learning.

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00:07:08,780 --> 00:07:10,760
MIT doesn't have a law school.

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00:07:10,760 --> 00:07:13,010
Harvard has a law school.

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00:07:13,010 --> 00:07:16,070
Harvard has had a law
school for a long time.

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00:07:16,070 --> 00:07:21,110
Presumably those are
strategic differences.

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00:07:21,110 --> 00:07:25,070
Yes, somebody actually
sat down and said,

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00:07:25,070 --> 00:07:26,480
should MIT have a law school?

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No, MIT shouldn't.

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That decision has been looked
at several times in history.

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Why do you think?

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AUDIENCE: So they can focus
on being the best in science

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and engineering.

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00:07:38,772 --> 00:07:41,230
RICHARD SCHMALENSEE: It focuses
on science and engineering,

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00:07:41,230 --> 00:07:44,840
and things that complement
and work with it.

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00:07:44,840 --> 00:07:47,810
So does economics make sense?

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00:07:47,810 --> 00:07:51,260
Yeah, it does,
historically it does.

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One of the early
presidents of MIT

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was the founder of the
American Economic Association,

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so somebody thought
it made sense.

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We've done business
for a long time,

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00:08:02,080 --> 00:08:05,080
almost since the start
of the institute.

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00:08:05,080 --> 00:08:08,090
How about linguistics?

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00:08:08,090 --> 00:08:09,410
Why do we do linguistics?

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AUDIENCE: I've
heard it's largely

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00:08:15,387 --> 00:08:18,492
because of Noam Chomsky, because
he developed the [INAUDIBLE]..

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00:08:18,492 --> 00:08:20,950
RICHARD SCHMALENSEE: Yeah, I
think that's the right answer.

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00:08:20,950 --> 00:08:24,700
I mean, my sense is a
whole bunch of decisions

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have been made that a
whole bunch of areas

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will be basically
service departments,

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00:08:28,750 --> 00:08:32,049
so that we can actually
give a rounded education.

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00:08:32,049 --> 00:08:36,490
And into that-- history, we
don't do advanced degrees

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in history.

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00:08:37,900 --> 00:08:40,120
And sociology we don't have.

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Psychology is very focused.

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00:08:42,070 --> 00:08:45,803
But into languages and
linguistics stumbles

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Noam Chomsky, and you say, oh,
my god, what an opportunity

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00:08:48,220 --> 00:08:51,100
this is, and so you build on it.

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00:08:51,100 --> 00:08:53,620
But it's not a big department,
and it's pretty focused.

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And we don't have a lot
of modern languages.

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We don't have a
French department.

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00:08:56,950 --> 00:08:58,690
We don't have a
Spanish department.

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00:08:58,690 --> 00:09:01,120
There's probably a French
department at Wellesley, yes?

187
00:09:01,120 --> 00:09:01,840
Yeah.

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00:09:01,840 --> 00:09:03,520
We don't have one.

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00:09:03,520 --> 00:09:05,710
So MIT does have a strategy.

190
00:09:05,710 --> 00:09:09,880
It's not perfectly--
not easily written down,

191
00:09:09,880 --> 00:09:13,090
but the strategic
descriptions have

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00:09:13,090 --> 00:09:16,270
to do with science,
engineering, and related fields,

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00:09:16,270 --> 00:09:18,310
and complementary fields.

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00:09:18,310 --> 00:09:20,470
Wellesley's is pretty clear.

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00:09:20,470 --> 00:09:24,790
Harvard's is we do
almost everything.

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00:09:24,790 --> 00:09:26,793
We're a full-service supplier.

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00:09:26,793 --> 00:09:28,210
It is interesting,
Harvard doesn't

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00:09:28,210 --> 00:09:29,252
have a veterinary school.

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00:09:29,252 --> 00:09:32,890
I'm not quite sure why, but they
have just about everything else

200
00:09:32,890 --> 00:09:35,260
you could think about.

201
00:09:35,260 --> 00:09:38,590
I don't think they have
Library Science, but just about

202
00:09:38,590 --> 00:09:39,740
everything else.

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00:09:39,740 --> 00:09:42,920
So those are strategies.

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00:09:42,920 --> 00:09:45,370
MIT has faced the
possibility of a law school.

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00:09:45,370 --> 00:09:47,260
MIT could make money
with a law school,

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00:09:47,260 --> 00:09:49,780
has decided not to
do it, has decided

207
00:09:49,780 --> 00:09:52,120
not to have a medical school.

208
00:09:52,120 --> 00:09:54,200
That's a harder call.

209
00:09:54,200 --> 00:09:56,870
That's a more interesting
call, but has decided

210
00:09:56,870 --> 00:09:59,270
not to do a medical school.

211
00:09:59,270 --> 00:10:03,050
Strategy is, to an important
extent, what you won't do.

212
00:10:03,050 --> 00:10:06,080
And you could certainly do a
net present value calculation

213
00:10:06,080 --> 00:10:09,280
for the MIT Medical
School and come out

214
00:10:09,280 --> 00:10:12,190
with a positive and
also social impact.

215
00:10:12,190 --> 00:10:15,190
You could also talk
about a law school

216
00:10:15,190 --> 00:10:18,760
with heavy focus on patent
law and related intellectual

217
00:10:18,760 --> 00:10:23,350
property fields, which
does, to a certain extent,

218
00:10:23,350 --> 00:10:26,890
complement, but also distracts.

219
00:10:26,890 --> 00:10:28,660
And that's a strategic choice.

220
00:10:28,660 --> 00:10:31,840
So universities, like all
kinds of other organizations,

221
00:10:31,840 --> 00:10:35,550
need to make strategic choices.

222
00:10:35,550 --> 00:10:39,010
Another strategy might be
we'll do almost anything that

223
00:10:39,010 --> 00:10:40,210
will turn a profit.

224
00:10:40,210 --> 00:10:42,900
And you see some
places look like that.

225
00:10:42,900 --> 00:10:45,380
MIT very much doesn't.

226
00:10:45,380 --> 00:10:49,900
So if you're really thinking
about a sustainable advantage

227
00:10:49,900 --> 00:10:52,120
of some sort, a
coherent strategy,

228
00:10:52,120 --> 00:11:03,880
you have to consider
the next bullet, or not.

229
00:11:03,880 --> 00:11:07,420
What the next bullet says
is, when the slide works,

230
00:11:07,420 --> 00:11:10,300
you have to think
about complementarities

231
00:11:10,300 --> 00:11:13,905
or fit among
investment projects.

232
00:11:13,905 --> 00:11:15,280
Meantime, I'm
going to figure out

233
00:11:15,280 --> 00:11:18,040
why this works or
this doesn't work.

234
00:11:18,040 --> 00:11:22,000
The nice piece that we had--

235
00:11:22,000 --> 00:11:23,630
tech support, please.

236
00:11:23,630 --> 00:11:26,960
I have a frozen
machine at the moment.

237
00:11:26,960 --> 00:11:30,850
There are nice examples
in Porter about IKEA

238
00:11:30,850 --> 00:11:34,150
and about Southwest
Airlines, and they're

239
00:11:34,150 --> 00:11:39,510
great examples of taking on
things that fit together.

240
00:11:39,510 --> 00:11:43,060
Southwest Airlines
doesn't offer food.

241
00:11:43,060 --> 00:11:46,690
Southwest Airlines flies
out of small airports.

242
00:11:46,690 --> 00:11:50,770
Southwest Airlines flies
one kind of airplane.

243
00:11:50,770 --> 00:11:56,080
All those things fit together--
low cost, convenient.

244
00:11:56,080 --> 00:12:00,280
You could make a case
that gee, if we had more--

245
00:12:00,280 --> 00:12:04,570
oh, and you don't book
through online services.

246
00:12:04,570 --> 00:12:05,748
You had a hammer?

247
00:12:05,748 --> 00:12:07,580
AUDIENCE: No, I
have to [INAUDIBLE]..

248
00:12:07,580 --> 00:12:10,277
RICHARD SCHMALENSEE:
OK, thank you.

249
00:12:10,277 --> 00:12:12,610
All right, we're going to try
to do this without slides.

250
00:12:12,610 --> 00:12:13,527
It's going to be good.

251
00:12:18,447 --> 00:12:21,970
The examples there are
things that fit together.

252
00:12:21,970 --> 00:12:25,030
You could imagine Southwest
doing a calculation,

253
00:12:25,030 --> 00:12:28,750
and saying, well, if we used
online booking services,

254
00:12:28,750 --> 00:12:30,490
we'd get more volume.

255
00:12:30,490 --> 00:12:32,470
And that'll cost us x percent.

256
00:12:32,470 --> 00:12:35,110
And you could imagine
saying, well, it'll

257
00:12:35,110 --> 00:12:38,410
increase our costs a little
bit, but it'll pay off.

258
00:12:38,410 --> 00:12:40,960
They have a relentless
focus on costs.

259
00:12:40,960 --> 00:12:42,525
We're not going to do it.

260
00:12:42,525 --> 00:12:44,650
We're not going to have
assigned seats-- that takes

261
00:12:44,650 --> 00:12:46,000
time and extra gate personnel.

262
00:12:46,000 --> 00:12:51,670
We're not going to do online
reservations, because that'll

263
00:12:51,670 --> 00:12:52,630
increase our costs.

264
00:12:52,630 --> 00:12:54,580
We're going to be
low cost, convenient.

265
00:12:54,580 --> 00:12:57,670
We're not going to have
different kinds of planes,

266
00:12:57,670 --> 00:12:59,320
even though on some
routes we might

267
00:12:59,320 --> 00:13:01,180
want to fly larger
planes, because that'll

268
00:13:01,180 --> 00:13:03,190
increase our costs.

269
00:13:03,190 --> 00:13:09,830
So Southwest thinks about how
its decisions fit together.

270
00:13:09,830 --> 00:13:13,780
Similarly, the example of
IKEA, which you all probably

271
00:13:13,780 --> 00:13:17,080
know better than I do, but you
go into a traditional furniture

272
00:13:17,080 --> 00:13:19,900
store, you can get all
kinds of different things.

273
00:13:19,900 --> 00:13:22,810
You order them-- many
fabrics, many styles.

274
00:13:22,810 --> 00:13:24,610
It takes six to eight weeks.

275
00:13:24,610 --> 00:13:28,900
Some slave in North Carolina
makes it, and it's shipped up.

276
00:13:28,900 --> 00:13:32,470
IKEA doesn't offer that,
doesn't offer the customization.

277
00:13:32,470 --> 00:13:36,100
It offers cost, convenience,
and a certain look.

278
00:13:36,100 --> 00:13:37,840
That's what it focuses on.

279
00:13:37,840 --> 00:13:41,390
All of its decisions
aim for that.

280
00:13:41,390 --> 00:13:43,660
So that's a coherent strategy.

281
00:13:43,660 --> 00:13:45,610
You don't just
take anything with

282
00:13:45,610 --> 00:13:47,110
a positive net present value.

283
00:13:47,110 --> 00:13:51,470
You ask how does it fit with
what we're trying to do?

284
00:13:51,470 --> 00:13:53,800
How does it fit with
what we're trying to do?

285
00:13:53,800 --> 00:13:59,980
An MIT law school might
have positive benefits.

286
00:13:59,980 --> 00:14:02,590
How does it fit
with the main focus?

287
00:14:02,590 --> 00:14:05,860
How would the law school faculty
interact with other faculty?

288
00:14:05,860 --> 00:14:07,450
Would it be the
kinds of people who

289
00:14:07,450 --> 00:14:08,860
will fit well on the campus?

290
00:14:08,860 --> 00:14:12,076
How would law students relate?

291
00:14:12,076 --> 00:14:15,510
That's not to say that
that's an obvious question.

292
00:14:15,510 --> 00:14:18,720
I always think a more
interesting strategic choice

293
00:14:18,720 --> 00:14:21,870
is, should MIT invest
more in public policy?

294
00:14:21,870 --> 00:14:24,450
We have STS and so forth.

295
00:14:24,450 --> 00:14:26,250
We don't have the
Kennedy School.

296
00:14:26,250 --> 00:14:28,110
You could imagine
a case being made

297
00:14:28,110 --> 00:14:30,510
for a serious public
policy school focused

298
00:14:30,510 --> 00:14:32,520
on science and technology.

299
00:14:32,520 --> 00:14:34,410
That case hasn't been made.

300
00:14:34,410 --> 00:14:36,810
And that's a money
loser, by the way,

301
00:14:36,810 --> 00:14:39,360
but it might have
other strategic value.

302
00:14:39,360 --> 00:14:40,513
Any hope?

303
00:14:40,513 --> 00:14:42,830
AUDIENCE: They have to reboot
the machine [INAUDIBLE]..

304
00:14:42,830 --> 00:14:45,830
RICHARD SCHMALENSEE: They
have to reboot the machine.

305
00:14:45,830 --> 00:14:47,690
OK.

306
00:14:47,690 --> 00:14:52,290
We now go to blackboard
for the next slide.

307
00:14:52,290 --> 00:14:56,510
The next slide has to do with--

308
00:14:56,510 --> 00:14:58,890
and I can't do blackboard
with a jacket on.

309
00:14:58,890 --> 00:15:03,370
So the next slide has to do
with industry attractiveness.

310
00:15:06,080 --> 00:15:14,810
So as I said, this is about
thinking about what activities

311
00:15:14,810 --> 00:15:15,560
you are doing.

312
00:15:15,560 --> 00:15:17,420
What are you offering customers?

313
00:15:17,420 --> 00:15:19,970
If you're offering
customers the same things

314
00:15:19,970 --> 00:15:23,510
as a lot of competitors,
then you can be really good,

315
00:15:23,510 --> 00:15:25,040
but unless there's
some way you're

316
00:15:25,040 --> 00:15:28,890
better that can't be imitated,
you've got a problem.

317
00:15:28,890 --> 00:15:33,800
So if you look at
an industry and you

318
00:15:33,800 --> 00:15:40,100
ask what things affect
profits, one thing

319
00:15:40,100 --> 00:15:41,780
is the intensity of competition.

320
00:15:45,720 --> 00:15:49,020
Another thing is
pressure from suppliers--

321
00:15:49,020 --> 00:15:50,490
I'll give you
examples in a minute.

322
00:15:54,960 --> 00:16:10,640
Another thing is pressure from
buyers, substitutes, and entry.

323
00:16:15,650 --> 00:16:24,860
This is an ugly version of the
famous Mike Porter Five Forces.

324
00:16:30,680 --> 00:16:34,100
If you understand this fully,
you're a third of the way

325
00:16:34,100 --> 00:16:36,648
through the MBA
course in strategy.

326
00:16:36,648 --> 00:16:37,940
So let me try to do it quickly.

327
00:16:37,940 --> 00:16:38,810
It's not very hard--

328
00:16:42,270 --> 00:16:46,160
maybe only a quarter
of the way through.

329
00:16:46,160 --> 00:16:50,480
Regardless of what the
supply conditions are,

330
00:16:50,480 --> 00:16:52,670
and whether they're
entrants or not,

331
00:16:52,670 --> 00:16:54,980
if the industry is
perfectly competitive,

332
00:16:54,980 --> 00:16:55,970
nobody makes any money.

333
00:16:55,970 --> 00:16:58,190
That's sort of the definition.

334
00:16:58,190 --> 00:17:02,330
And obviously, competition runs
along some sort of spectrum

335
00:17:02,330 --> 00:17:05,900
between a lot of small firms
beating each other's brains out

336
00:17:05,900 --> 00:17:09,740
and one monopoly taking
everything there is to be had.

337
00:17:09,740 --> 00:17:12,740
So this is one force that
can affect competition,

338
00:17:12,740 --> 00:17:15,890
can affect profits, is the
intensity of competition

339
00:17:15,890 --> 00:17:18,290
within the industry.

340
00:17:18,290 --> 00:17:24,020
Another force is the existence
of close substitutes.

341
00:17:24,020 --> 00:17:27,109
We all make wax paper, and we're
great wax paper manufacturers,

342
00:17:27,109 --> 00:17:30,320
but plastic wrap is
eating our lunch.

343
00:17:30,320 --> 00:17:35,030
And so there may be only two or
three of us making wax paper,

344
00:17:35,030 --> 00:17:40,070
but with the availability
of cheap plastic wrap,

345
00:17:40,070 --> 00:17:42,830
it means we have probably
declining demand.

346
00:17:42,830 --> 00:17:46,490
It means we probably have a
highly elastic demand curve.

347
00:17:46,490 --> 00:17:49,530
And even with a monopoly,
we can't make any money,

348
00:17:49,530 --> 00:17:52,400
so close, good
substitutes erode profits.

349
00:17:57,110 --> 00:17:59,120
Please have at it.

350
00:17:59,120 --> 00:18:01,010
I'm a wax paper manufacturer.

351
00:18:01,010 --> 00:18:04,610
There's only one of me, but
anybody and his kid sister

352
00:18:04,610 --> 00:18:06,550
can make wax paper.

353
00:18:06,550 --> 00:18:09,002
That's not quite right, and
it could be his kid brother,

354
00:18:09,002 --> 00:18:10,210
too, don't mean to be sexist.

355
00:18:10,210 --> 00:18:13,720
But if it's really
easy for competitors

356
00:18:13,720 --> 00:18:16,240
to come in if anybody's
making any money,

357
00:18:16,240 --> 00:18:20,170
nobody can sustain high profits.

358
00:18:20,170 --> 00:18:22,630
So you look at entry when
you do an industry analysis,

359
00:18:22,630 --> 00:18:25,390
is it easy for
outsiders to come in?

360
00:18:25,390 --> 00:18:27,316
What are the obstacles?

361
00:18:27,316 --> 00:18:29,300
Do you need
specialized knowledge?

362
00:18:29,300 --> 00:18:31,450
Do you need huge capital?

363
00:18:31,450 --> 00:18:33,320
What are the problems?

364
00:18:33,320 --> 00:18:36,550
If there aren't any
obvious barriers--

365
00:18:36,550 --> 00:18:39,682
we're making furniture
in North Carolina.

366
00:18:39,682 --> 00:18:41,890
What do you need to make
furniture in North Carolina?

367
00:18:41,890 --> 00:18:43,270
You need to hire
good carpenters,

368
00:18:43,270 --> 00:18:46,945
and get a supply of wood,
and have some design skill.

369
00:18:46,945 --> 00:18:48,580
Are those high
barriers to entry?

370
00:18:48,580 --> 00:18:50,080
Probably not.

371
00:18:50,080 --> 00:18:52,420
So would you expect,
even if there are only

372
00:18:52,420 --> 00:18:54,310
a small number of
furniture manufacturers,

373
00:18:54,310 --> 00:18:56,185
would you expect them
to make a lot of money?

374
00:18:56,185 --> 00:18:58,840
Probably not.

375
00:18:58,840 --> 00:19:05,560
OK, suppliers-- my
favorite example

376
00:19:05,560 --> 00:19:09,780
here really is
airlines, because one

377
00:19:09,780 --> 00:19:12,360
of the things that characterized
airlines, particularly

378
00:19:12,360 --> 00:19:17,190
under regulation, is
very strong unions.

379
00:19:17,190 --> 00:19:20,910
So while the airlines
didn't make any money,

380
00:19:20,910 --> 00:19:24,590
airline employees did.

381
00:19:24,590 --> 00:19:27,752
Pilots earn very high salary
for relatively little work.

382
00:19:27,752 --> 00:19:29,210
Flight attendants--
this is, again,

383
00:19:29,210 --> 00:19:32,180
in the days of regulation--
flight attendants

384
00:19:32,180 --> 00:19:34,100
earned very high salaries.

385
00:19:34,100 --> 00:19:38,960
The regulators pushed prices
up, and most of the rent,

386
00:19:38,960 --> 00:19:42,200
most of the profit, went down
here to the unionized suppliers

387
00:19:42,200 --> 00:19:45,470
because there was pretty
heavy competition up here.

388
00:19:45,470 --> 00:19:50,030
So we had competition here,
the ability here to earn rent.

389
00:19:50,030 --> 00:19:52,010
You see this in a
lot of industries

390
00:19:52,010 --> 00:19:56,240
where there's relatively little
competition in the industry--

391
00:19:56,240 --> 00:20:01,250
competition within the industry,
substitutes, buyers, entrants,

392
00:20:01,250 --> 00:20:03,560
suppliers.

393
00:20:03,560 --> 00:20:08,000
Is injection molding a good
business to be in in 1995?

394
00:20:08,000 --> 00:20:10,436
Julian, why not?

395
00:20:10,436 --> 00:20:13,610
AUDIENCE: Because
China does it cheaper.

396
00:20:13,610 --> 00:20:17,840
RICHARD SCHMALENSEE: Well,
not in 1995, they didn't.

397
00:20:17,840 --> 00:20:22,130
Let's stay within the bounds
of the case if we can.

398
00:20:22,130 --> 00:20:23,570
Anybody else?

399
00:20:23,570 --> 00:20:25,650
Charlotte.

400
00:20:25,650 --> 00:20:27,570
AUDIENCE: No, because
at that point,

401
00:20:27,570 --> 00:20:30,440
competitors are thinking
of ways to do things

402
00:20:30,440 --> 00:20:33,034
cheaper to [INAUDIBLE]
money and also

403
00:20:33,034 --> 00:20:36,620
because the buyers
were these people using

404
00:20:36,620 --> 00:20:38,120
the machines that
they were making,

405
00:20:38,120 --> 00:20:43,114
and the materials they
needed were in high demand,

406
00:20:43,114 --> 00:20:44,757
so prices are going up.

407
00:20:44,757 --> 00:20:46,340
RICHARD SCHMALENSEE:
That's the resin.

408
00:20:46,340 --> 00:20:47,270
We'll come to that.

409
00:20:47,270 --> 00:20:51,350
But this thing, you're
saying there's just a lot

410
00:20:51,350 --> 00:20:54,320
going on here within
the industry-- very

411
00:20:54,320 --> 00:20:56,450
intense computation.

412
00:20:56,450 --> 00:20:59,480
What's interesting about
this is that's right.

413
00:20:59,480 --> 00:21:01,700
It doesn't look like
most of that industry

414
00:21:01,700 --> 00:21:05,780
is very attractive, even
though it's growing like crazy.

415
00:21:05,780 --> 00:21:07,340
The industry is
growing like crazy--

416
00:21:07,340 --> 00:21:09,080
it's a great
example of everybody

417
00:21:09,080 --> 00:21:12,380
having to run fast to
stay in the same place,

418
00:21:12,380 --> 00:21:15,140
because there's a lot of
innovation, as Charlotte says,

419
00:21:15,140 --> 00:21:18,800
and if you're not
doing it, you lose.

420
00:21:18,800 --> 00:21:22,725
So industries that look
like that are not uncommon.

421
00:21:22,725 --> 00:21:24,350
You think about the
early days-- again,

422
00:21:24,350 --> 00:21:27,200
Warren Buffett-- the
early days of automobiles.

423
00:21:27,200 --> 00:21:30,260
There were hundreds of
people making automobiles.

424
00:21:30,260 --> 00:21:32,150
And they were all
making great progress,

425
00:21:32,150 --> 00:21:34,242
and innovating like crazy,
and automobile sales

426
00:21:34,242 --> 00:21:36,200
were taking off like a
rocket, and most of them

427
00:21:36,200 --> 00:21:40,790
died because they were offering
more or less the same kind

428
00:21:40,790 --> 00:21:44,570
of product, doing more or less
the same things as everybody

429
00:21:44,570 --> 00:21:47,880
else, and had to run
to keep in place.

430
00:21:47,880 --> 00:21:56,870
So I think in terms of we hear
a little bit about buyers--

431
00:21:56,870 --> 00:21:57,800
only a little bit.

432
00:21:57,800 --> 00:22:02,390
One of the big bottle makers is
mentioned as a powerful buyer.

433
00:22:02,390 --> 00:22:04,890
We don't know much about that.

434
00:22:04,890 --> 00:22:08,740
Substitutes, we seem
to be pretty good.

435
00:22:08,740 --> 00:22:11,800
This looks like an
industry people can enter.

436
00:22:11,800 --> 00:22:13,977
This does not look like
a high barrier industry.

437
00:22:13,977 --> 00:22:15,810
We're not told much
about that, but we don't

438
00:22:15,810 --> 00:22:18,000
see much of a problem there.

439
00:22:18,000 --> 00:22:20,190
There seem to be lots
of mold makers and lots

440
00:22:20,190 --> 00:22:21,730
of suppliers of components.

441
00:22:21,730 --> 00:22:23,460
So we don't seem to
have a problem here.

442
00:22:23,460 --> 00:22:25,000
The real problem
in this industry

443
00:22:25,000 --> 00:22:30,450
is here, where there's just
very intense competition,

444
00:22:30,450 --> 00:22:33,750
even though there's high growth,
even though there's innovation.

445
00:22:33,750 --> 00:22:35,520
Everybody is innovating.

446
00:22:35,520 --> 00:22:37,350
Everybody is moving.

447
00:22:37,350 --> 00:22:42,350
And everybody's running very
fast to stay in the same place.

448
00:22:42,350 --> 00:22:44,140
So how do you beat this?

449
00:22:44,140 --> 00:22:48,610
Well, let me talk generically,
and then we'll go to Husky.

450
00:22:48,610 --> 00:22:55,240
So generically,
stepping way back,

451
00:22:55,240 --> 00:22:58,260
you've got to both create
value and capture it.

452
00:22:58,260 --> 00:23:04,530
So if you think
about suppliers, what

453
00:23:04,530 --> 00:23:12,900
would you get for airplanes
and airline personnel?

454
00:23:12,900 --> 00:23:14,700
What would you have
to pay to get a pilot

455
00:23:14,700 --> 00:23:18,060
to fly as opposed to what you
do pay to get a pilot to fly--

456
00:23:18,060 --> 00:23:23,610
again, in the great old
days of limited competition.

457
00:23:23,610 --> 00:23:26,670
There may well be a gap between
the suppliers' opportunity

458
00:23:26,670 --> 00:23:29,280
costs-- what else could they do
with their capital and labor--

459
00:23:29,280 --> 00:23:30,810
and what they sell for.

460
00:23:30,810 --> 00:23:33,840
That's captured by the supplier.

461
00:23:33,840 --> 00:23:42,820
There better be some gap between
what buyers are willing to pay

462
00:23:42,820 --> 00:23:45,620
and what they actually pay.

463
00:23:45,620 --> 00:23:47,300
And the difference
is what you get

464
00:23:47,300 --> 00:23:50,780
to take home, the difference
between what it actually costs

465
00:23:50,780 --> 00:23:52,400
you and what you can sell.

466
00:23:52,400 --> 00:23:54,890
And this is, like, yeah.

467
00:23:54,890 --> 00:23:58,250
This is pretty straightforward
and pretty obvious.

468
00:23:58,250 --> 00:24:01,320
But you really do need
to think through--

469
00:24:01,320 --> 00:24:03,020
and I love the
animation-- you do

470
00:24:03,020 --> 00:24:06,523
need to think through
who captures it.

471
00:24:06,523 --> 00:24:07,940
If you go to the
airlines, there's

472
00:24:07,940 --> 00:24:14,150
anomalous value created by the
airline industry, historically.

473
00:24:14,150 --> 00:24:15,890
Imagine it going away.

474
00:24:15,890 --> 00:24:20,750
It's not captured, by and
large, by the airline companies.

475
00:24:20,750 --> 00:24:21,770
Where does it go?

476
00:24:21,770 --> 00:24:25,250
Well, with the decline of
airline unions, less of it

477
00:24:25,250 --> 00:24:32,350
gets captured by suppliers, and
more of it's captured by us.

478
00:24:32,350 --> 00:24:35,470
If you think about the
alternative way of--

479
00:24:35,470 --> 00:24:36,850
I was in Florida last week.

480
00:24:36,850 --> 00:24:39,580
And driving to Florida, which
I have done, is not much fun.

481
00:24:39,580 --> 00:24:42,490
So I would have been willing
to spend a lot more than it

482
00:24:42,490 --> 00:24:45,040
cost me to fly.

483
00:24:45,040 --> 00:24:48,220
I got a huge surplus.

484
00:24:48,220 --> 00:24:51,113
I don't have the impression that
the folks supplying the airline

485
00:24:51,113 --> 00:24:52,280
were getting a lot of money.

486
00:24:52,280 --> 00:24:54,370
And I know the airline
wasn't getting much

487
00:24:54,370 --> 00:24:56,210
in terms of captured surplus.

488
00:24:56,210 --> 00:25:00,310
So the basic strategic question
is, in any kind of industry--

489
00:25:00,310 --> 00:25:02,650
attractive or unattractive--

490
00:25:02,650 --> 00:25:05,140
can you do this?

491
00:25:05,140 --> 00:25:10,300
So where Porter is pointing,
and where this case points us,

492
00:25:10,300 --> 00:25:13,450
is to ways to not
do the same thing

493
00:25:13,450 --> 00:25:16,310
your competitors are doing.

494
00:25:16,310 --> 00:25:18,950
What can we do differently?

495
00:25:18,950 --> 00:25:24,040
Well, the first basic-- this is
sort of the Southwest strategy.

496
00:25:24,040 --> 00:25:30,730
This says, we are going to drive
down costs and in a way that's

497
00:25:30,730 --> 00:25:32,380
hard to imitate.

498
00:25:32,380 --> 00:25:35,260
We'll talk about what
makes it hard to imitate.

499
00:25:35,260 --> 00:25:38,230
We're going to drive
down costs, and maybe we

500
00:25:38,230 --> 00:25:40,960
supply a somewhat
different product.

501
00:25:40,960 --> 00:25:43,318
Southwest's product is not
very useful for somebody

502
00:25:43,318 --> 00:25:45,610
who-- not very interesting
to somebody who always flies

503
00:25:45,610 --> 00:25:47,620
first class and cares about it.

504
00:25:47,620 --> 00:25:49,540
They don't do first class.

505
00:25:49,540 --> 00:25:51,160
They've written that off.

506
00:25:51,160 --> 00:25:53,020
They don't do frequent
flyer, I don't think.

507
00:25:53,020 --> 00:25:54,490
Maybe they do.

508
00:25:54,490 --> 00:25:57,250
But for a whole set
of business travelers,

509
00:25:57,250 --> 00:25:58,962
they're not that attractive.

510
00:25:58,962 --> 00:26:00,670
They're cheap, yeah,
but if somebody else

511
00:26:00,670 --> 00:26:02,825
is paying my airfare,
that's not too attractive.

512
00:26:02,825 --> 00:26:04,950
They're not convenient
because I can't book online.

513
00:26:04,950 --> 00:26:05,810
I think about my own travel.

514
00:26:05,810 --> 00:26:07,352
Usually somebody
else is paying and I

515
00:26:07,352 --> 00:26:09,340
book online for simplicity.

516
00:26:09,340 --> 00:26:13,610
I never fly Southwest because
the fare difference doesn't

517
00:26:13,610 --> 00:26:15,620
bother the people who
are paying my airfare,

518
00:26:15,620 --> 00:26:19,370
and online booking is
so enormously convenient

519
00:26:19,370 --> 00:26:21,030
that I just do it.

520
00:26:21,030 --> 00:26:27,740
So I'm not in the set of
consumers they're aiming at.

521
00:26:27,740 --> 00:26:28,760
So what?

522
00:26:28,760 --> 00:26:30,230
There are enough of them.

523
00:26:30,230 --> 00:26:32,600
There are enough people and
enough travel occasions--

524
00:26:32,600 --> 00:26:35,870
and I can imagine occasions when
I would check Southwest just

525
00:26:35,870 --> 00:26:39,050
to see if they're cheaper.

526
00:26:39,050 --> 00:26:40,340
That's a strategy.

527
00:26:40,340 --> 00:26:47,160
That issue there is what
makes it hard to imitate.

528
00:26:47,160 --> 00:26:49,620
What makes it hard to imitate?

529
00:26:49,620 --> 00:26:53,060
As Charlotte pointed out in
the injection molding business,

530
00:26:53,060 --> 00:26:58,170
everybody's innovating,
and in the airline

531
00:26:58,170 --> 00:27:01,650
business everybody does
electronic reservations,

532
00:27:01,650 --> 00:27:04,080
and everybody does this,
and everybody does that--

533
00:27:04,080 --> 00:27:07,600
lots of innovation,
everybody driving down

534
00:27:07,600 --> 00:27:10,180
costs-- more fuel
efficient engines,

535
00:27:10,180 --> 00:27:13,270
no barriers to imitation.

536
00:27:13,270 --> 00:27:15,370
United can copy
what American does.

537
00:27:15,370 --> 00:27:19,220
American can copy
what United does.

538
00:27:19,220 --> 00:27:21,740
There are seminars on
industry best practice.

539
00:27:21,740 --> 00:27:23,480
Everybody does
industry best practice.

540
00:27:23,480 --> 00:27:26,360
You don't make any money
doing industry best practice.

541
00:27:26,360 --> 00:27:27,810
You may avoid losing money.

542
00:27:27,810 --> 00:27:29,750
So that's strategy one.

543
00:27:29,750 --> 00:27:32,330
Can I somehow get low costs?

544
00:27:32,330 --> 00:27:35,690
And I highlight this
"some consumers,"

545
00:27:35,690 --> 00:27:40,430
because Southwest and IKEA
are nice examples of picking

546
00:27:40,430 --> 00:27:44,490
a piece of the market which a
low-cost strategy makes sense.

547
00:27:44,490 --> 00:27:47,610
Not everybody goes to IKEA.

548
00:27:47,610 --> 00:27:51,060
I've never been in an
IKEA, as it happens.

549
00:27:51,060 --> 00:27:54,600
But lots of people
do, and that's

550
00:27:54,600 --> 00:27:57,330
enough to make them
a lot of money.

551
00:27:57,330 --> 00:28:00,120
The other strategy,
not too surprisingly,

552
00:28:00,120 --> 00:28:03,900
is to go the other
direction, is to find a way

553
00:28:03,900 --> 00:28:06,300
to increase perceived
quality, willingness

554
00:28:06,300 --> 00:28:12,990
to pay for some buyers
to justify higher prices.

555
00:28:12,990 --> 00:28:16,650
What can we do to
justify higher prices?

556
00:28:16,650 --> 00:28:21,430
And again, there are examples--

557
00:28:21,430 --> 00:28:24,910
Mercedes Benz is a high quality.

558
00:28:24,910 --> 00:28:26,950
They don't do the same
thing that everybody else

559
00:28:26,950 --> 00:28:29,830
does, not the same kind of car.

560
00:28:29,830 --> 00:28:30,670
It costs more.

561
00:28:30,670 --> 00:28:31,900
It absolutely costs more.

562
00:28:31,900 --> 00:28:34,600
In this example, the
cost is the same,

563
00:28:34,600 --> 00:28:36,227
but you could still
make a lot of money

564
00:28:36,227 --> 00:28:37,810
if those costs were
a little higher as

565
00:28:37,810 --> 00:28:44,180
long as the differentiation
is effective.

566
00:28:44,180 --> 00:28:49,030
So this kind of strategy,
you pick something

567
00:28:49,030 --> 00:28:49,945
that somebody values.

568
00:28:53,050 --> 00:28:55,870
Actually, the online
bookings-- well, not quite.

569
00:28:55,870 --> 00:28:58,390
That's an interesting story.

570
00:28:58,390 --> 00:28:59,740
You meet the needs.

571
00:28:59,740 --> 00:29:01,360
You add costs.

572
00:29:01,360 --> 00:29:03,160
You get premium prices--

573
00:29:03,160 --> 00:29:09,760
terrific story, but it
has to be cost effective.

574
00:29:09,760 --> 00:29:12,350
That is to say, you
can raise the price,

575
00:29:12,350 --> 00:29:16,060
but if your costs go up by
more than the price, you lose.

576
00:29:16,060 --> 00:29:20,230
And you come down
to the same issue--

577
00:29:20,230 --> 00:29:22,840
is imitation difficult?

578
00:29:22,840 --> 00:29:24,550
Is imitation difficult?

579
00:29:24,550 --> 00:29:27,730
Again, we're going to
see this in Husky--

580
00:29:27,730 --> 00:29:29,530
is imitation difficult?

581
00:29:32,080 --> 00:29:37,600
There's sort of-- nice diagram--

582
00:29:37,600 --> 00:29:42,850
there's sort of three
kinds of stories about ways

583
00:29:42,850 --> 00:29:47,740
that imitation can be
difficult. The first

584
00:29:47,740 --> 00:29:52,360
is sort of the IKEA/Southwest
up on top, the integration,

585
00:29:52,360 --> 00:29:55,360
that if you have to
build the company

586
00:29:55,360 --> 00:29:59,200
to deliver on a
strategy effectively,

587
00:29:59,200 --> 00:30:02,860
that's, again in Porter, the
Southwest Airlines versus--

588
00:30:02,860 --> 00:30:05,470
what was it, Continental Light.

589
00:30:05,470 --> 00:30:07,472
So Continental decides
they can compete

590
00:30:07,472 --> 00:30:08,680
with these low-cost carriers.

591
00:30:08,680 --> 00:30:10,510
They'll offer a
low-cost carrier.

592
00:30:10,510 --> 00:30:15,100
They won't serve meals and
they won't do assigned seats,

593
00:30:15,100 --> 00:30:17,560
but they do baggage
interchange with other airlines

594
00:30:17,560 --> 00:30:19,660
because they're Continental.

595
00:30:19,660 --> 00:30:23,860
They do online booking
because they're Continental.

596
00:30:23,860 --> 00:30:25,600
They do a variety
of other things

597
00:30:25,600 --> 00:30:26,890
because they're Continental.

598
00:30:26,890 --> 00:30:31,970
And they can't get the
cost down that low.

599
00:30:31,970 --> 00:30:33,800
To get the cost down
that low, you've

600
00:30:33,800 --> 00:30:35,330
got to integrate
the whole thing.

601
00:30:35,330 --> 00:30:41,030
You've got to build an
IKEA to deliver IKEA.

602
00:30:41,030 --> 00:30:45,590
You can't have an IKEA tacked
on to something else, which

603
00:30:45,590 --> 00:30:48,770
means it's hard for an
existing firm to copy--

604
00:30:48,770 --> 00:30:51,875
the notion that you have to
integrate the whole system.

605
00:30:56,960 --> 00:31:00,800
I guess another sort
of example like that

606
00:31:00,800 --> 00:31:04,820
would be Jiffy Lube or one
of the quick lube places

607
00:31:04,820 --> 00:31:06,200
that used to--
you don't see them

608
00:31:06,200 --> 00:31:08,780
as much as you used to--
that offers cheap oil change.

609
00:31:08,780 --> 00:31:11,210
That's all they do
or all they did.

610
00:31:11,210 --> 00:31:12,715
And could you imitate that?

611
00:31:12,715 --> 00:31:14,090
Yeah, you could,
but you'd really

612
00:31:14,090 --> 00:31:17,060
have to have the company
focused on doing just that.

613
00:31:17,060 --> 00:31:21,830
You can't do cheap oil change
as part of a full service repair

614
00:31:21,830 --> 00:31:23,870
shop that does other
things because you've

615
00:31:23,870 --> 00:31:27,830
got all that overhead
and all of the systems

616
00:31:27,830 --> 00:31:28,820
to handle everything.

617
00:31:28,820 --> 00:31:31,490
If you just do oil change,
it's a simple business.

618
00:31:31,490 --> 00:31:33,080
You could do it very cheaply.

619
00:31:33,080 --> 00:31:35,300
If you do more, you've got
to hire different people,

620
00:31:35,300 --> 00:31:36,842
you've got to have
different systems,

621
00:31:36,842 --> 00:31:38,510
you've got to have
different inventory.

622
00:31:38,510 --> 00:31:40,940
So one reason it
could be hard is

623
00:31:40,940 --> 00:31:43,220
that everything is integrated.

624
00:31:43,220 --> 00:31:44,810
Everything is integrated.

625
00:31:44,810 --> 00:31:47,180
It would be hard--

626
00:31:47,180 --> 00:31:52,100
well, interestingly enough, if
you think about General Motors,

627
00:31:52,100 --> 00:31:56,570
historically, Cadillac
was focused on luxury cars

628
00:31:56,570 --> 00:32:00,650
and was sort of kept
separate from the rest of GM.

629
00:32:00,650 --> 00:32:05,120
In the glory years, Cadillac
delivered luxury cars.

630
00:32:05,120 --> 00:32:09,260
You couldn't have the Cadillac
operation closely integrated

631
00:32:09,260 --> 00:32:12,440
with the Chevrolet operation.

632
00:32:12,440 --> 00:32:15,770
You have different philosophies,
you have different purchasing,

633
00:32:15,770 --> 00:32:18,050
you have different
design approaches.

634
00:32:18,050 --> 00:32:22,980
Cadillac, everything was focused
on a certain kind of car--

635
00:32:22,980 --> 00:32:26,070
integrated, built to deliver.

636
00:32:26,070 --> 00:32:28,050
You have to build a system--

637
00:32:28,050 --> 00:32:30,750
as many people
did, it turns out--

638
00:32:30,750 --> 00:32:33,450
to compete.

639
00:32:33,450 --> 00:32:36,780
The second-- there
on the right--

640
00:32:36,780 --> 00:32:38,910
capture model is cost.

641
00:32:38,910 --> 00:32:40,560
You have a cost advantage.

642
00:32:40,560 --> 00:32:42,630
How can you have
a cost advantage?

643
00:32:42,630 --> 00:32:45,480
Well, there might be
economies of scale.

644
00:32:45,480 --> 00:32:47,070
You might have
learning advantages.

645
00:32:47,070 --> 00:32:48,990
You might have other
kinds of advantages.

646
00:32:48,990 --> 00:32:52,350
There are lots of ways you
could have an advantage in cost.

647
00:32:52,350 --> 00:32:54,370
Yeah, Andrew.

648
00:32:54,370 --> 00:32:56,620
AUDIENCE: I just had a
question regarding integration.

649
00:32:56,620 --> 00:32:58,450
These might be
really bad examples.

650
00:32:58,450 --> 00:33:00,620
I'm just curious
where they fit in.

651
00:33:00,620 --> 00:33:04,140
Like, a company like
Walmart or like Toyota that

652
00:33:04,140 --> 00:33:06,670
are quite large scale,
but then again, I've

653
00:33:06,670 --> 00:33:10,002
heard many things about the way
they, for example, figured out

654
00:33:10,002 --> 00:33:13,660
how to have a really
integrated system

655
00:33:13,660 --> 00:33:16,044
from the supplier to the end
product and all that thing.

656
00:33:16,044 --> 00:33:21,790
I'm just curious, are
they simply exceptions?

657
00:33:21,790 --> 00:33:25,190
Or are they doing some other
things also that I've not seen?

658
00:33:25,190 --> 00:33:29,590
RICHARD SCHMALENSEE: Well,
Toyota is a great case.

659
00:33:29,590 --> 00:33:32,050
And others may know that
system better than I do.

660
00:33:32,050 --> 00:33:36,250
They combine a number
of things, but it

661
00:33:36,250 --> 00:33:40,600
is an example of a system built
to do a couple of things well.

662
00:33:40,600 --> 00:33:47,500
First, they built a
product development system.

663
00:33:47,500 --> 00:33:50,962
It was much quicker than
American manufacturers,

664
00:33:50,962 --> 00:33:53,170
and indeed, much quicker
than European manufacturers.

665
00:33:53,170 --> 00:33:57,380
So they could go from concept
to model on the street quicker.

666
00:33:57,380 --> 00:34:03,190
So that's the innovation
speed down there in the left.

667
00:34:03,190 --> 00:34:04,600
Could you imitate it?

668
00:34:04,600 --> 00:34:06,770
A lot of people tried.

669
00:34:06,770 --> 00:34:09,429
There were no obvious
barriers to imitating that.

670
00:34:09,429 --> 00:34:14,050
They also had some clever
ways they did manufacturing--

671
00:34:14,050 --> 00:34:17,440
just in time, and the whole
Kanban and quality circles.

672
00:34:17,440 --> 00:34:21,000
There was a whole
manufacturing system.

673
00:34:21,000 --> 00:34:21,900
Could you copy it?

674
00:34:21,900 --> 00:34:25,090
Well, a lot of people tried.

675
00:34:25,090 --> 00:34:27,159
And that's what's interesting.

676
00:34:27,159 --> 00:34:29,650
There was the Toyota-General
Motors joint venture

677
00:34:29,650 --> 00:34:33,250
that produced-- what was it that
they produced in California?

678
00:34:33,250 --> 00:34:34,760
NUMMI, yes.

679
00:34:34,760 --> 00:34:37,929
And General Motors was going
to learn the Toyota system

680
00:34:37,929 --> 00:34:40,270
and copy it.

681
00:34:40,270 --> 00:34:43,270
Well, the cultures
were different.

682
00:34:43,270 --> 00:34:46,886
And the GM workforce--

683
00:34:46,886 --> 00:34:48,969
you've been doing something
some way for 30 years,

684
00:34:48,969 --> 00:34:50,761
and somebody says, now
we're going to do it

685
00:34:50,761 --> 00:34:54,190
this other way, that's hard.

686
00:34:54,190 --> 00:34:57,940
And you have to change the
inventory control system

687
00:34:57,940 --> 00:35:00,222
and your purchasing system.

688
00:35:00,222 --> 00:35:01,930
Then you go to your
designers, and you've

689
00:35:01,930 --> 00:35:05,800
got to change the speed at
which you produce new products

690
00:35:05,800 --> 00:35:08,170
by changing that system.

691
00:35:08,170 --> 00:35:10,390
I mean, I'd say Toyota
was successfully

692
00:35:10,390 --> 00:35:14,180
copied over a long time.

693
00:35:14,180 --> 00:35:16,510
I wouldn't say GM has
successfully copied them.

694
00:35:16,510 --> 00:35:20,180
It wasn't that Toyota was
bigger than anybody else.

695
00:35:20,180 --> 00:35:21,880
They were doing
a better job when

696
00:35:21,880 --> 00:35:23,950
they were smaller,
certainly smaller

697
00:35:23,950 --> 00:35:25,660
than the American companies.

698
00:35:25,660 --> 00:35:34,080
So they got cost by developing
a manufacturing and design

699
00:35:34,080 --> 00:35:39,030
system that was simply
better, and the advantage held

700
00:35:39,030 --> 00:35:42,060
because even though it looked
like you could copy it,

701
00:35:42,060 --> 00:35:45,090
and there were articles and
books written on how you do

702
00:35:45,090 --> 00:35:47,580
the Toyota, the Japanese
system, it turned out

703
00:35:47,580 --> 00:35:52,605
to be harder to put it in place
because you had to do it all.

704
00:35:52,605 --> 00:35:56,280
And again, over
time, there are lots

705
00:35:56,280 --> 00:35:58,710
of studies where you
see companies now

706
00:35:58,710 --> 00:36:00,870
that have that approach.

707
00:36:00,870 --> 00:36:02,490
But it was sustainable.

708
00:36:02,490 --> 00:36:05,130
And Toyota's not in great shape.

709
00:36:05,130 --> 00:36:10,230
It was sustainable in
part because of the fact

710
00:36:10,230 --> 00:36:12,030
that it was a system.

711
00:36:12,030 --> 00:36:13,950
You had to do the whole thing.

712
00:36:13,950 --> 00:36:15,570
You couldn't just
change inventory.

713
00:36:15,570 --> 00:36:17,280
You couldn't just change design.

714
00:36:17,280 --> 00:36:20,490
You had to take the
whole thing, and that

715
00:36:20,490 --> 00:36:22,770
meant bringing people along.

716
00:36:22,770 --> 00:36:24,340
Could you do a startup that way?

717
00:36:24,340 --> 00:36:27,510
Yeah, much easier to do
a startup, much easier

718
00:36:27,510 --> 00:36:30,180
to take people who've never
built or designed automobiles,

719
00:36:30,180 --> 00:36:32,375
and say, here's how
we're going to do it,

720
00:36:32,375 --> 00:36:33,750
but then you've
got a whole bunch

721
00:36:33,750 --> 00:36:36,280
of people who've never built
or designed automobiles.

722
00:36:36,280 --> 00:36:40,680
So it's a nice example.

723
00:36:40,680 --> 00:36:41,610
Thank you.

724
00:36:41,610 --> 00:36:43,710
Anything else?

725
00:36:43,710 --> 00:36:45,460
Any other comments?

726
00:36:45,460 --> 00:36:50,770
OK, let's do Husky.

727
00:36:50,770 --> 00:36:51,770
What's Husky's strategy?

728
00:36:54,380 --> 00:36:55,850
What is it that-- we're '95--

729
00:36:55,850 --> 00:36:57,600
what is it historically
Husky wouldn't do?

730
00:36:57,600 --> 00:36:58,950
Mary.

731
00:36:58,950 --> 00:37:01,375
AUDIENCE: So they stuck to
some of the core values,

732
00:37:01,375 --> 00:37:04,770
like professionalism
and dedicated hard work.

733
00:37:04,770 --> 00:37:10,228
They also devoted a lot of
stuff to the health and--

734
00:37:10,228 --> 00:37:12,270
RICHARD SCHMALENSEE: So
that's a good description

735
00:37:12,270 --> 00:37:18,060
of the culture, of how they
went about doing what they did.

736
00:37:18,060 --> 00:37:19,320
What did they do?

737
00:37:19,320 --> 00:37:20,940
What were their activities?

738
00:37:20,940 --> 00:37:22,200
Did they focus?

739
00:37:22,200 --> 00:37:25,260
Were they trying to do all
kinds of injection molding,

740
00:37:25,260 --> 00:37:28,710
some kinds of injection
molding, low end, high end,

741
00:37:28,710 --> 00:37:30,606
middle of the market?

742
00:37:30,606 --> 00:37:32,583
AUDIENCE: They focused
on the PET system.

743
00:37:32,583 --> 00:37:34,750
RICHARD SCHMALENSEE: PET
and the thin-wall business,

744
00:37:34,750 --> 00:37:37,630
so they focused on two segments.

745
00:37:37,630 --> 00:37:39,220
They didn't do everything.

746
00:37:39,220 --> 00:37:42,595
And as you say, they had this
very interesting culture.

747
00:37:45,400 --> 00:37:46,450
So we got that one.

748
00:37:46,450 --> 00:37:49,180
Don't freeze again.

749
00:37:49,180 --> 00:37:53,530
What distinguished those
segments from other segments?

750
00:37:53,530 --> 00:37:57,730
How were the PET and
the thin-wall segments

751
00:37:57,730 --> 00:38:02,840
different from other parts of
the business, other segments?

752
00:38:02,840 --> 00:38:04,040
Any obvious way?

753
00:38:04,040 --> 00:38:04,603
Yeah.

754
00:38:04,603 --> 00:38:06,520
AUDIENCE: I think they
were trying to-- sorry,

755
00:38:06,520 --> 00:38:07,395
I forgot my name tag.

756
00:38:07,395 --> 00:38:09,982
RICHARD SCHMALENSEE: Yeah, but
you do remember who you are.

757
00:38:09,982 --> 00:38:10,690
We're good there.

758
00:38:10,690 --> 00:38:11,140
OK.

759
00:38:11,140 --> 00:38:11,410
Yes.

760
00:38:11,410 --> 00:38:13,535
AUDIENCE: I think they were
trying to find segments

761
00:38:13,535 --> 00:38:17,062
where a technological
advantage is sustainable,

762
00:38:17,062 --> 00:38:18,520
but it actually
makes a difference.

763
00:38:18,520 --> 00:38:21,010
Like the thin-wall
business, it's

764
00:38:21,010 --> 00:38:24,602
like there's probably more
technological know-how

765
00:38:24,602 --> 00:38:26,810
to make it, and allows you
to make the walls thinner,

766
00:38:26,810 --> 00:38:30,010
and you can machine
it faster and stuff

767
00:38:30,010 --> 00:38:32,680
like that, where it hadn't
been really monetized yet,

768
00:38:32,680 --> 00:38:34,660
[INAUDIBLE].

769
00:38:34,660 --> 00:38:37,600
RICHARD SCHMALENSEE: What
about the PET bottle business?

770
00:38:37,600 --> 00:38:40,600
How is that different?

771
00:38:40,600 --> 00:38:42,760
AUDIENCE: It seemed like--

772
00:38:42,760 --> 00:38:43,730
I wasn't really sure.

773
00:38:43,730 --> 00:38:45,230
It seemed like they
kind of wound up

774
00:38:45,230 --> 00:38:47,745
in that by accident sort of.

775
00:38:47,745 --> 00:38:48,370
They're, like--

776
00:38:48,370 --> 00:38:49,995
RICHARD SCHMALENSEE:
Well, think about.

777
00:38:49,995 --> 00:38:52,660
I mean there's some
nice description of--

778
00:38:52,660 --> 00:38:55,180
suppose you're
doing Coke bottles,

779
00:38:55,180 --> 00:38:58,930
and you're running this
incredibly rapid bottling

780
00:38:58,930 --> 00:38:59,560
apparatus.

781
00:38:59,560 --> 00:39:01,727
And you produce the bottles
and you fill the bottles

782
00:39:01,727 --> 00:39:02,380
under pressure.

783
00:39:02,380 --> 00:39:05,990
What matters a lot?

784
00:39:05,990 --> 00:39:09,560
Quality, maybe, defects,
maybe, because when

785
00:39:09,560 --> 00:39:12,530
a bottle explodes and
you've got to stop the line,

786
00:39:12,530 --> 00:39:14,390
that's terrible.

787
00:39:14,390 --> 00:39:18,095
So performance and technology
matter in those segments.

788
00:39:18,095 --> 00:39:20,553
AUDIENCE: They're not making
the blow molded machines, only

789
00:39:20,553 --> 00:39:21,443
the preformed.

790
00:39:21,443 --> 00:39:22,860
RICHARD SCHMALENSEE:
Yeah, but you

791
00:39:22,860 --> 00:39:24,392
want to make those
free of defects.

792
00:39:24,392 --> 00:39:26,100
AUDIENCE: Because when
you blow them up--

793
00:39:26,100 --> 00:39:28,222
RICHARD SCHMALENSEE: When
you blow them up, yeah.

794
00:39:28,222 --> 00:39:30,180
I think there's a number
in the case about sort

795
00:39:30,180 --> 00:39:31,800
of typical defects
in one of theirs

796
00:39:31,800 --> 00:39:33,690
versus typical defects
in competitors.

797
00:39:33,690 --> 00:39:35,410
And it's a big difference.

798
00:39:35,410 --> 00:39:38,640
And the story is when
you blow them up,

799
00:39:38,640 --> 00:39:41,640
and then you fill
them under pressure,

800
00:39:41,640 --> 00:39:45,570
and they explode and stop a
bottling line, that's terrible.

801
00:39:45,570 --> 00:39:48,270
So if you can deliver
product that won't do that,

802
00:39:48,270 --> 00:39:49,590
you've got an advantage.

803
00:39:49,590 --> 00:39:50,580
OK.

804
00:39:50,580 --> 00:39:54,840
So it's segments where
performance matters,

805
00:39:54,840 --> 00:39:56,400
where technology is useful.

806
00:39:59,533 --> 00:40:01,450
One of the things that
comes out in the case--

807
00:40:01,450 --> 00:40:03,450
you have to read it kind
of closely to get this,

808
00:40:03,450 --> 00:40:07,800
but it buys a lot of stuff.

809
00:40:07,800 --> 00:40:11,910
It makes the molds, but
it buys a lot of inputs,

810
00:40:11,910 --> 00:40:13,290
more than its competitors.

811
00:40:13,290 --> 00:40:14,340
Any obvious reason?

812
00:40:20,610 --> 00:40:21,970
Catherine.

813
00:40:21,970 --> 00:40:25,320
AUDIENCE: Well, doesn't the
case that their campuses

814
00:40:25,320 --> 00:40:26,640
are very centralized.

815
00:40:26,640 --> 00:40:30,960
And it goes back to the
culture, their employees

816
00:40:30,960 --> 00:40:32,560
are generally very happy there.

817
00:40:32,560 --> 00:40:35,040
So it said that they
buy a lot of their molds

818
00:40:35,040 --> 00:40:38,060
from people who generally
were former employees so

819
00:40:38,060 --> 00:40:39,888
[INAUDIBLE].

820
00:40:39,888 --> 00:40:42,430
RICHARD SCHMALENSEE: So they
buy a lot from former employees,

821
00:40:42,430 --> 00:40:43,020
yeah.

822
00:40:43,020 --> 00:40:46,650
So that's part of the
ecosystem, as the phrase goes.

823
00:40:49,440 --> 00:40:52,170
But as focused as they are
on technical excellence

824
00:40:52,170 --> 00:40:55,750
of their machines,
could they do that

825
00:40:55,750 --> 00:40:57,520
for everything, all the inputs?

826
00:41:02,240 --> 00:41:06,890
AUDIENCE: Instead of trying
to just manufacture products,

827
00:41:06,890 --> 00:41:08,780
they have a focus on
service and the entire--

828
00:41:08,780 --> 00:41:10,280
RICHARD SCHMALENSEE:
They focus on--

829
00:41:10,280 --> 00:41:12,530
AUDIENCE: --package, basically.

830
00:41:12,530 --> 00:41:15,709
So they try to specialize
more because then they

831
00:41:15,709 --> 00:41:18,042
can provide more services
throughout the company so that

832
00:41:18,042 --> 00:41:19,020
[INAUDIBLE].

833
00:41:19,020 --> 00:41:20,260
RICHARD SCHMALENSEE: So
they have technical people

834
00:41:20,260 --> 00:41:20,990
out in the field.

835
00:41:20,990 --> 00:41:23,530
So they can provide a
great deal of service,

836
00:41:23,530 --> 00:41:26,320
and sort of co-engineering
with their clients.

837
00:41:26,320 --> 00:41:30,040
And they're in segments
where that matters.

838
00:41:30,040 --> 00:41:35,500
And trying to do that for
all of the components,

839
00:41:35,500 --> 00:41:38,920
and trying to hyper-engineer
all of their components

840
00:41:38,920 --> 00:41:40,930
would spread them a
little thin, I think.

841
00:41:40,930 --> 00:41:44,920
And I think that's
one reason why

842
00:41:44,920 --> 00:41:47,980
they make fewer inputs
than their competitors,

843
00:41:47,980 --> 00:41:52,450
because they've decided to focus
on the parts of the business

844
00:41:52,450 --> 00:41:55,120
where performance and quality
and technology matter.

845
00:41:58,480 --> 00:41:59,650
What's the answer to that?

846
00:41:59,650 --> 00:42:04,890
They make some molds,
particularly for PET.

847
00:42:04,890 --> 00:42:08,520
They offer hot runners, and a
variety of other things that

848
00:42:08,520 --> 00:42:10,270
competitors don't.

849
00:42:10,270 --> 00:42:12,780
Any reasons why?

850
00:42:12,780 --> 00:42:13,540
Wyatt.

851
00:42:13,540 --> 00:42:16,320
AUDIENCE: It said in the
reading with the hot runners was

852
00:42:16,320 --> 00:42:18,270
they were selling the
hot runners to Gillette

853
00:42:18,270 --> 00:42:22,770
or whatever, but Gillette
wasn't using their actual mold

854
00:42:22,770 --> 00:42:23,517
machines.

855
00:42:23,517 --> 00:42:24,600
They're using hot runners.

856
00:42:24,600 --> 00:42:27,070
And then later on,
they were able to grab

857
00:42:27,070 --> 00:42:29,770
a contract with Gillette
before the actual [INAUDIBLE]..

858
00:42:29,770 --> 00:42:31,770
RICHARD SCHMALENSEE: So
it's part of the system.

859
00:42:31,770 --> 00:42:34,860
Being good at that
adds to performance

860
00:42:34,860 --> 00:42:36,330
and gives you a business edge.

861
00:42:36,330 --> 00:42:39,900
And they're very tightly
focused on these two segments.

862
00:42:39,900 --> 00:42:43,620
So you want to make everything
you can for those segments.

863
00:42:43,620 --> 00:42:46,580
You want to not worry
about the inputs.

864
00:42:52,620 --> 00:42:54,390
And it's made a lot of money.

865
00:42:54,390 --> 00:42:56,970
The case makes it clear--
it's grown like gangbusters.

866
00:42:56,970 --> 00:43:00,720
It's got a return on equity
of something like 40%.

867
00:43:00,720 --> 00:43:05,220
Why, at least until recently,
hasn't anybody copied them?

868
00:43:05,220 --> 00:43:06,930
What are the barriers
to imitation?

869
00:43:06,930 --> 00:43:10,470
What has made this
strategy sustainable,

870
00:43:10,470 --> 00:43:11,370
at least for a while.

871
00:43:11,370 --> 00:43:12,210
Nothing's forever.

872
00:43:12,210 --> 00:43:13,320
Brendan.

873
00:43:13,320 --> 00:43:16,478
AUDIENCE: They have a huge
technological advantage.

874
00:43:16,478 --> 00:43:18,145
Their machines are a
lot more expensive.

875
00:43:18,145 --> 00:43:20,140
There's a deep
knowledge base there.

876
00:43:20,140 --> 00:43:22,555
So it's hard to copy the
kind of quality machines

877
00:43:22,555 --> 00:43:23,780
that they produce.

878
00:43:23,780 --> 00:43:26,072
RICHARD SCHMALENSEE: But you
could imagine they don't--

879
00:43:26,072 --> 00:43:27,590
nobody talks about
patents, though.

880
00:43:27,590 --> 00:43:29,570
We don't hear patent barriers.

881
00:43:29,570 --> 00:43:32,990
So you could imagine they have
the only advanced manufacturing

882
00:43:32,990 --> 00:43:33,740
center.

883
00:43:33,740 --> 00:43:35,670
They've set up a
little think tank--

884
00:43:35,670 --> 00:43:36,920
I don't know how little it is.

885
00:43:36,920 --> 00:43:40,400
They set up a think
tank to do R&D. Why

886
00:43:40,400 --> 00:43:41,920
don't other people do that?

887
00:43:41,920 --> 00:43:43,837
AUDIENCE: They don't
want to invest the money.

888
00:43:43,837 --> 00:43:47,920
They'd rather spend the money
elsewhere, not have that cost.

889
00:43:47,920 --> 00:43:50,770
RICHARD SCHMALENSEE:
So this is part of--

890
00:43:53,350 --> 00:43:55,990
well, let me push you
on that a little bit,

891
00:43:55,990 --> 00:43:58,810
because they're
making so much money.

892
00:43:58,810 --> 00:44:00,610
They're growing
like gangbusters.

893
00:44:00,610 --> 00:44:02,830
They're making so much money.

894
00:44:02,830 --> 00:44:05,020
Wouldn't you imitate
them if you could?

895
00:44:05,020 --> 00:44:09,710
I mean, so yeah, you got to
set up a manufacturing center.

896
00:44:09,710 --> 00:44:10,750
These are big companies.

897
00:44:10,750 --> 00:44:12,670
Mannesmann is a big company.

898
00:44:12,670 --> 00:44:14,740
AUDIENCE: That's why
companies eventually

899
00:44:14,740 --> 00:44:17,710
did kind of get into the
markets that they were selling.

900
00:44:17,710 --> 00:44:19,370
RICHARD SCHMALENSEE:
They saw it, yeah.

901
00:44:19,370 --> 00:44:20,870
AUDIENCE: They sold
cheaper machines

902
00:44:20,870 --> 00:44:23,162
that can do the same job,
maybe not to the same quality

903
00:44:23,162 --> 00:44:23,718
but close.

904
00:44:23,718 --> 00:44:25,760
RICHARD SCHMALENSEE: And
try to come in on price.

905
00:44:25,760 --> 00:44:26,438
Yeah.

906
00:44:26,438 --> 00:44:27,980
AUDIENCE: Isn't the
kind of customer,

907
00:44:27,980 --> 00:44:29,320
though, that's
concerned about quality

908
00:44:29,320 --> 00:44:31,300
and is willing to pay more
for it, like it would make

909
00:44:31,300 --> 00:44:33,883
more sense it would go with the
company that had been doing it

910
00:44:33,883 --> 00:44:36,670
for longer and kind of has the
history and reputation, rather

911
00:44:36,670 --> 00:44:39,940
than a company that has
just copied their technology

912
00:44:39,940 --> 00:44:42,930
and is getting that
niche of the market

913
00:44:42,930 --> 00:44:44,507
and doesn't have the reputation.

914
00:44:44,507 --> 00:44:46,590
RICHARD SCHMALENSEE: And
they really sort of built

915
00:44:46,590 --> 00:44:48,820
the company to do
this, haven't they?

916
00:44:48,820 --> 00:44:49,320
[INAUDIBLE]

917
00:44:49,320 --> 00:44:53,140
AUDIENCE: Well, my guess would
be that if you try to imitate,

918
00:44:53,140 --> 00:44:55,080
you're effectively
increasing competition

919
00:44:55,080 --> 00:44:58,110
that does make the business
not as profitable as it

920
00:44:58,110 --> 00:44:59,680
would be otherwise.

921
00:44:59,680 --> 00:45:02,387
RICHARD SCHMALENSEE: So the
segment may not be that big,

922
00:45:02,387 --> 00:45:02,970
you're saying.

923
00:45:02,970 --> 00:45:04,770
And so you'd have to
do the numbers to say,

924
00:45:04,770 --> 00:45:06,930
is there room for two
of us to play this game?

925
00:45:06,930 --> 00:45:07,560
Maxwell.

926
00:45:07,560 --> 00:45:09,060
AUDIENCE: I think
also it has a lot

927
00:45:09,060 --> 00:45:10,602
to do with the
culture of the company

928
00:45:10,602 --> 00:45:13,060
and you needed that
culture to make machines.

929
00:45:13,060 --> 00:45:15,077
It's hard to switch
an entire culture.

930
00:45:15,077 --> 00:45:16,660
RICHARD SCHMALENSEE:
Yeah, the culture

931
00:45:16,660 --> 00:45:19,160
is sort of part of it, is
an intriguing part of it,

932
00:45:19,160 --> 00:45:19,660
isn't it?

933
00:45:19,660 --> 00:45:21,073
They've got a peculiar culture.

934
00:45:21,073 --> 00:45:22,240
I want to come back to that.

935
00:45:22,240 --> 00:45:23,020
Charlotte.

936
00:45:23,020 --> 00:45:25,660
AUDIENCE: Also, the
fact that we said

937
00:45:25,660 --> 00:45:27,370
they're only focusing
on this one thing,

938
00:45:27,370 --> 00:45:29,320
whereas other companies
that were also

939
00:45:29,320 --> 00:45:31,990
in the mold-making business
focused more widely.

940
00:45:31,990 --> 00:45:35,830
Even when they started
to come into this area,

941
00:45:35,830 --> 00:45:38,530
they sort of added onto
machines they already had,

942
00:45:38,530 --> 00:45:43,030
instead of actually changing
into the same company.

943
00:45:43,030 --> 00:45:45,550
Nobody shut down all
their other manufacturing

944
00:45:45,550 --> 00:45:48,220
and focused specifically
on these two things.

945
00:45:48,220 --> 00:45:51,100
They just incorporated it into
what they were already doing.

946
00:45:51,100 --> 00:45:53,110
Maybe companies
[INAUDIBLE] they calculated

947
00:45:53,110 --> 00:45:55,870
what it would take for
them to get to the point

948
00:45:55,870 --> 00:45:56,860
where Husky was.

949
00:45:56,860 --> 00:45:58,970
It would just have
changed their [INAUDIBLE]..

950
00:45:58,970 --> 00:46:00,720
RICHARD SCHMALENSEE:
So this would sort of

951
00:46:00,720 --> 00:46:02,920
be a little bit of the
reverse of Continental

952
00:46:02,920 --> 00:46:04,150
versus Continental Light.

953
00:46:04,150 --> 00:46:07,450
This would be like,
well, they tried it.

954
00:46:07,450 --> 00:46:09,850
This would be like
grafting a luxury car

955
00:46:09,850 --> 00:46:12,490
business onto
Volkswagen, or as Toyota

956
00:46:12,490 --> 00:46:17,148
did, doing Lexus, which
they set off to one side

957
00:46:17,148 --> 00:46:19,690
because you really couldn't do
the mainstream Toyota business

958
00:46:19,690 --> 00:46:23,170
and the Lexus business
under the same management.

959
00:46:23,170 --> 00:46:27,370
So part of it is they
really built it for this.

960
00:46:27,370 --> 00:46:29,680
Do you think it has higher
or lower than average costs?

961
00:46:29,680 --> 00:46:30,888
That's pretty clear, I think.

962
00:46:34,030 --> 00:46:35,650
Matthew, what do you think?

963
00:46:35,650 --> 00:46:38,020
You think Husky's a high
cost operation or a low cost

964
00:46:38,020 --> 00:46:40,150
operation?

965
00:46:40,150 --> 00:46:44,985
AUDIENCE: Well, they're high
in the sense of charging--

966
00:46:44,985 --> 00:46:47,110
RICHARD SCHMALENSEE: No,
not in terms of high price

967
00:46:47,110 --> 00:46:50,530
but in terms of their cost.

968
00:46:50,530 --> 00:46:53,140
Even though they've got
this lab on the side,

969
00:46:53,140 --> 00:46:55,360
they've got this advanced
manufacturing center.

970
00:46:55,360 --> 00:46:56,740
They've got day care.

971
00:46:56,740 --> 00:46:58,660
They're very ecologically good.

972
00:46:58,660 --> 00:47:03,310
AUDIENCE: They're charging high
scores that nobody can produce.

973
00:47:03,310 --> 00:47:07,968
[INAUDIBLE] So I'm
saying low in comparison

974
00:47:07,968 --> 00:47:09,010
to what they're charging.

975
00:47:09,010 --> 00:47:11,135
RICHARD SCHMALENSEE: That
may be, but in comparison

976
00:47:11,135 --> 00:47:12,550
to their competitors?

977
00:47:12,550 --> 00:47:13,390
AUDIENCE: They're
higher, because they're

978
00:47:13,390 --> 00:47:14,530
producing higher quality.

979
00:47:14,530 --> 00:47:16,780
RICHARD SCHMALENSEE: They're
producing higher quality.

980
00:47:16,780 --> 00:47:19,540
And if you think about the
culture and everything else,

981
00:47:19,540 --> 00:47:23,410
this is not a
company that skimps.

982
00:47:23,410 --> 00:47:25,570
This is not a
company that skimps.

983
00:47:25,570 --> 00:47:28,933
They invest in R&D. They
invest in technology.

984
00:47:28,933 --> 00:47:30,100
They invest in their people.

985
00:47:33,730 --> 00:47:36,850
Do you think that's
important, the culture?

986
00:47:36,850 --> 00:47:41,555
Is that a key part of
the story, do you think?

987
00:47:41,555 --> 00:47:43,430
Not sure I know the
answer to this, but yeah.

988
00:47:43,430 --> 00:47:44,892
AUDIENCE: I think it is.

989
00:47:44,892 --> 00:47:46,600
Just you mentioned
before, it's something

990
00:47:46,600 --> 00:47:48,642
you can get up in the
morning and go to work for.

991
00:47:48,642 --> 00:47:51,720
It keeps people motivated, keeps
your workforce working hard.

992
00:47:51,720 --> 00:47:53,070
RICHARD SCHMALENSEE: Even
getting your T-square--

993
00:47:53,070 --> 00:47:55,528
imagine T-squares-- even getting
your T-square straightened

994
00:47:55,528 --> 00:47:57,510
on your desk, you think?

995
00:47:57,510 --> 00:48:03,540
I mean, neatening your
code when you're gone.

996
00:48:03,540 --> 00:48:05,583
It's an interesting
culture, I have to say.

997
00:48:05,583 --> 00:48:07,000
Matthew, you're
raising your hand.

998
00:48:07,000 --> 00:48:07,960
Yeah.

999
00:48:07,960 --> 00:48:09,540
AUDIENCE: I mean,
they said in there

1000
00:48:09,540 --> 00:48:12,360
that whenever they
extended day care hours,

1001
00:48:12,360 --> 00:48:15,070
it was a kind of thing
to make them work harder,

1002
00:48:15,070 --> 00:48:18,892
not just for extended day
care hours for the kids.

1003
00:48:18,892 --> 00:48:21,100
RICHARD SCHMALENSEE: Well,
they're not doing charity,

1004
00:48:21,100 --> 00:48:21,600
are they?

1005
00:48:21,600 --> 00:48:26,290
But they have a particular
culture of we value our people.

1006
00:48:26,290 --> 00:48:27,610
We value the environment.

1007
00:48:27,610 --> 00:48:32,150
We value excellence, which
would be a tough culture

1008
00:48:32,150 --> 00:48:37,400
to sustain if they were aiming
for the low end of the market.

1009
00:48:37,400 --> 00:48:40,850
If you're aiming for the
low end, that's tough.

1010
00:48:40,850 --> 00:48:43,880
If you're aiming
for the high end,

1011
00:48:43,880 --> 00:48:48,200
it's like Ritz-Carlton Hotels
aim for a particular kind

1012
00:48:48,200 --> 00:48:49,880
of service.

1013
00:48:49,880 --> 00:48:53,150
And their code is
ladies and gentlemen

1014
00:48:53,150 --> 00:48:55,250
served by ladies and gentlemen.

1015
00:48:55,250 --> 00:48:57,770
If you're going to treat
your people like ladies

1016
00:48:57,770 --> 00:49:02,130
and gentlemen, you're going to
have higher costs than if you

1017
00:49:02,130 --> 00:49:03,770
treat them like pond scum.

1018
00:49:03,770 --> 00:49:07,780
You will also, with some
luck, get better service.

1019
00:49:07,780 --> 00:49:10,600
So this is a culture that
really does aim high.

1020
00:49:10,600 --> 00:49:11,820
Would you like to work there?

1021
00:49:16,650 --> 00:49:20,730
Show of hands-- who'd like
to work for this company.

1022
00:49:20,730 --> 00:49:25,590
OK, who would find
it really awful?

1023
00:49:25,590 --> 00:49:28,260
Charlotte would not like
her T-square straightened.

1024
00:49:28,260 --> 00:49:30,330
Neither would Maxwell.

1025
00:49:30,330 --> 00:49:33,090
I mean, it's for some
people and not for others.

1026
00:49:33,090 --> 00:49:35,570
It's autocratic.

1027
00:49:35,570 --> 00:49:37,573
The boss runs it.

1028
00:49:37,573 --> 00:49:39,740
One of the questions that's
suggested for discussion

1029
00:49:39,740 --> 00:49:46,400
is, could you do this
company without Shapp

1030
00:49:46,400 --> 00:49:49,740
in charge, Schad, rather.

1031
00:49:49,740 --> 00:49:51,470
Could you do this
without an autocrat

1032
00:49:51,470 --> 00:49:57,040
in charge, such a strong
culture, such a tight focus?

1033
00:49:57,040 --> 00:49:59,745
Not obvious.

1034
00:49:59,745 --> 00:50:00,245
OK.

1035
00:50:03,340 --> 00:50:05,020
What else do I want to do?

1036
00:50:05,020 --> 00:50:08,415
This is some numbers, which I
don't expect you to have done.

1037
00:50:08,415 --> 00:50:09,790
And I should have
made this clear

1038
00:50:09,790 --> 00:50:13,660
because you can do a fair
amount of work on the numbers.

1039
00:50:13,660 --> 00:50:16,810
And I'll illustrate
this kind of analysis.

1040
00:50:16,810 --> 00:50:24,010
For products like this,
it is often useful--

1041
00:50:24,010 --> 00:50:27,250
and energy products, a lot of
them come into this category,

1042
00:50:27,250 --> 00:50:28,420
like light bulbs--

1043
00:50:28,420 --> 00:50:32,770
you can do the demand analysis
by simply turning yourself

1044
00:50:32,770 --> 00:50:35,800
around and thinking
about this as a buyer.

1045
00:50:35,800 --> 00:50:38,290
If you were a buyer
producing bottles,

1046
00:50:38,290 --> 00:50:40,480
what would you be willing
to pay for a Husky

1047
00:50:40,480 --> 00:50:43,540
system versus some other
system, given the parameters?

1048
00:50:43,540 --> 00:50:46,090
And that gives you a sense
of what Husky can charge,

1049
00:50:46,090 --> 00:50:47,800
given other people's.

1050
00:50:47,800 --> 00:50:54,520
It's easier when it's something
like we're making bottles.

1051
00:50:54,520 --> 00:50:56,538
It's a little harder when
we're making Priuses,

1052
00:50:56,538 --> 00:50:58,330
because you don't know
what the willingness

1053
00:50:58,330 --> 00:51:04,390
to pay for intangibles is, or
hardwood interiors in a car.

1054
00:51:04,390 --> 00:51:08,440
That you can't sort of read
off the process figures.

1055
00:51:08,440 --> 00:51:12,070
But for something
like light bulbs,

1056
00:51:12,070 --> 00:51:15,550
for something like injection
molding machines, you can say,

1057
00:51:15,550 --> 00:51:17,200
OK, I'm running a factory.

1058
00:51:17,200 --> 00:51:20,810
What would I buy at
different prices,

1059
00:51:20,810 --> 00:51:23,170
and turn the analysis around.

1060
00:51:23,170 --> 00:51:26,472
And I'll just show
you the results.

1061
00:51:26,472 --> 00:51:28,930
These aren't my numbers, these
are somebody else's numbers,

1062
00:51:28,930 --> 00:51:32,230
but it's useful for
this kind of analysis.

1063
00:51:32,230 --> 00:51:37,060
You basically want to
say, start with the rival.

1064
00:51:37,060 --> 00:51:43,270
What would it cost in terms
of the machine, maybe the fact

1065
00:51:43,270 --> 00:51:45,490
that you've got to get more
machines because it's not

1066
00:51:45,490 --> 00:51:47,410
as productive, the
fact that maybe it

1067
00:51:47,410 --> 00:51:50,680
takes more energy, the fact that
it takes more raw materials--

1068
00:51:50,680 --> 00:51:53,770
what would it cost you--
this is called p star--

1069
00:51:53,770 --> 00:51:58,150
to do what you'd get out of
a Husky system for price p?

1070
00:51:58,150 --> 00:52:00,550
There's enough in the
case you can do this,

1071
00:52:00,550 --> 00:52:06,010
if you're very ambitious, for
thin walls and for PET systems.

1072
00:52:06,010 --> 00:52:11,140
This is a calculation
for thin wall.

1073
00:52:11,140 --> 00:52:15,880
The competitors-- use
margarine containers--

1074
00:52:15,880 --> 00:52:20,020
the competitor's system
has a longer cycle time,

1075
00:52:20,020 --> 00:52:25,660
it produces heavier components,
a heavier weight container.

1076
00:52:25,660 --> 00:52:27,910
It costs less.

1077
00:52:27,910 --> 00:52:30,980
So to get the same
output, again,

1078
00:52:30,980 --> 00:52:33,010
this assumes you
have a large factory,

1079
00:52:33,010 --> 00:52:38,320
you'd need 1 and 2/3 competitor
machines to get as much

1080
00:52:38,320 --> 00:52:40,990
as out of a Husky machine.

1081
00:52:40,990 --> 00:52:46,600
That means 1 and 2/3
times 350 is 408.

1082
00:52:46,600 --> 00:52:51,310
There's also a resin saving,
because the Husky container

1083
00:52:51,310 --> 00:52:53,020
is lighter.

1084
00:52:53,020 --> 00:52:58,240
So to replace a
$400,000 Husky machine,

1085
00:52:58,240 --> 00:53:04,720
you'd have to do $408,000
worth of competitor equipment

1086
00:53:04,720 --> 00:53:08,230
plus extra resin per year.

1087
00:53:08,230 --> 00:53:10,630
That's a willingness
to pay analysis.

1088
00:53:10,630 --> 00:53:13,660
So that says Husky
could, depending

1089
00:53:13,660 --> 00:53:17,050
on how the competitor
discounted, and depending

1090
00:53:17,050 --> 00:53:19,420
on how much the
competitor produced,

1091
00:53:19,420 --> 00:53:22,660
Husky could charge
even more than $400,000

1092
00:53:22,660 --> 00:53:25,960
and would still be
the machine of choice.

1093
00:53:25,960 --> 00:53:28,000
This is the kind of
analysis you would

1094
00:53:28,000 --> 00:53:32,770
expect a buyer to do, deciding
what kind of machine to buy.

1095
00:53:32,770 --> 00:53:35,560
And it's the kind of
analysis you'd expect Husky

1096
00:53:35,560 --> 00:53:37,975
to do in thinking about price.

1097
00:53:41,020 --> 00:53:44,230
In the past, I've taught a
pricing course here at Sloan.

1098
00:53:44,230 --> 00:53:49,120
And my favorite case is a
case about contact lenses

1099
00:53:49,120 --> 00:53:51,160
for chickens.

1100
00:53:51,160 --> 00:53:55,660
And it's a great pricing case
because the contact lenses

1101
00:53:55,660 --> 00:54:00,340
for chickens cost nothing.

1102
00:54:00,340 --> 00:54:03,250
You put them in the chicken
for about $0.25 a chicken.

1103
00:54:03,250 --> 00:54:05,080
They cost about a penny.

1104
00:54:05,080 --> 00:54:07,060
And they keep the
chickens, if they work,

1105
00:54:07,060 --> 00:54:09,630
from pecking each
other to death.

1106
00:54:09,630 --> 00:54:11,710
And if you do the
calculation, you

1107
00:54:11,710 --> 00:54:15,130
find those lenses are
worth about $4 apiece--

1108
00:54:15,130 --> 00:54:18,490
made up number, but
very, very high.

1109
00:54:18,490 --> 00:54:21,640
And most people in the
class immediately say, well,

1110
00:54:21,640 --> 00:54:26,560
it cost $0.25, so what we'll
do is we'll market up to $0.30.

1111
00:54:26,560 --> 00:54:27,803
And the answer is no.

1112
00:54:27,803 --> 00:54:29,470
If you do the willingness
to pay answer,

1113
00:54:29,470 --> 00:54:32,830
you can mark it up to
$3 as long as you've

1114
00:54:32,830 --> 00:54:35,080
got the patent monopoly on it.

1115
00:54:35,080 --> 00:54:37,030
The buyer would be
willing to pay $3

1116
00:54:37,030 --> 00:54:39,170
rather than do without it.

1117
00:54:39,170 --> 00:54:42,550
And in fact, if it's worth
$4 on this kind of analysis,

1118
00:54:42,550 --> 00:54:46,510
you charge $3 and they're happy.

1119
00:54:46,510 --> 00:54:48,160
So this is a kind
of analysis you

1120
00:54:48,160 --> 00:54:51,787
can do for industrial products.

1121
00:54:51,787 --> 00:54:53,620
That's a great case,
except as it turns out,

1122
00:54:53,620 --> 00:54:55,420
the contact lenses fell
out of the chickens.

1123
00:54:55,420 --> 00:54:57,640
The chickens plucked each
other to death and the firm

1124
00:54:57,640 --> 00:54:58,140
went broke.

1125
00:54:58,140 --> 00:55:03,520
But still, it's a
great case to teach.

1126
00:55:03,520 --> 00:55:06,550
It fails only the
realistic test.

1127
00:55:06,550 --> 00:55:11,620
This says the more containers
somebody wants to produce,

1128
00:55:11,620 --> 00:55:14,240
and the lower their
discount rate,

1129
00:55:14,240 --> 00:55:16,990
the better the Husky system is.

1130
00:55:16,990 --> 00:55:21,250
This is a similar analysis, a
willingness to pay analysis,

1131
00:55:21,250 --> 00:55:24,080
for a PET preform system.

1132
00:55:24,080 --> 00:55:31,450
And again, the Husky
container weight is lower.

1133
00:55:31,450 --> 00:55:37,680
The cost is lower,
takes up-- well,

1134
00:55:37,680 --> 00:55:41,180
I'm going to have to go back.

1135
00:55:41,180 --> 00:55:43,880
The key things you
see will turn out

1136
00:55:43,880 --> 00:55:50,070
to be the energy savings
and the resin savings.

1137
00:55:50,070 --> 00:55:54,170
So what you get here is it
produces a lighter container,

1138
00:55:54,170 --> 00:55:55,460
so there's a resin saving.

1139
00:55:55,460 --> 00:55:57,860
It's more efficient, so
there's an energy saving.

1140
00:55:57,860 --> 00:56:00,440
There's also a little
floor space saving.

1141
00:56:00,440 --> 00:56:02,480
So it's the same thing--

1142
00:56:02,480 --> 00:56:06,680
to replace a Husky system
costing $1.2 million,

1143
00:56:06,680 --> 00:56:13,220
you'd need to spend more
capacity and more yearly cost.

1144
00:56:13,220 --> 00:56:20,230
So again, when you think
about an industrial product,

1145
00:56:20,230 --> 00:56:24,190
this is the sort of
analysis you go through.

1146
00:56:24,190 --> 00:56:26,830
When you're a buyer you do
it, and when you're a seller

1147
00:56:26,830 --> 00:56:27,520
you do it.

1148
00:56:27,520 --> 00:56:30,340
Now again, the analysis
may be different

1149
00:56:30,340 --> 00:56:32,330
for different customers.

1150
00:56:32,330 --> 00:56:39,530
This is a case where you're
assuming that, again, I can--

1151
00:56:39,530 --> 00:56:40,490
where have I got it?

1152
00:56:40,490 --> 00:56:46,040
Yeah, I need 1.34 rival systems
to replace a Husky system

1153
00:56:46,040 --> 00:56:48,590
because the Husky system
is more productive.

1154
00:56:48,590 --> 00:56:51,380
Well, depending on how
big the factory is,

1155
00:56:51,380 --> 00:56:52,940
that may or may
not make any sense

1156
00:56:52,940 --> 00:56:55,370
because they don't
come in fractions.

1157
00:56:55,370 --> 00:56:57,500
If it's a large thing, yeah.

1158
00:56:57,500 --> 00:57:01,010
If the typical customer
has one system,

1159
00:57:01,010 --> 00:57:03,980
then the analysis is
going to be different.

1160
00:57:03,980 --> 00:57:10,040
OK, any questions about
this kind of analysis?

1161
00:57:10,040 --> 00:57:12,200
Folks with an
engineering background,

1162
00:57:12,200 --> 00:57:14,180
this sort of ought to
come pretty naturally,

1163
00:57:14,180 --> 00:57:17,900
just working out
on a spreadsheet.

1164
00:57:17,900 --> 00:57:21,640
What would you do if
you didn't buy ours?

1165
00:57:21,640 --> 00:57:22,480
How would you do it?

1166
00:57:22,480 --> 00:57:23,970
What would it cost?

1167
00:57:23,970 --> 00:57:27,500
Is there a gap?

1168
00:57:27,500 --> 00:57:33,460
So the answer to this
is, at least as of 1995

1169
00:57:33,460 --> 00:57:40,600
before troubles begin,
Husky systems are worth--

1170
00:57:40,600 --> 00:57:44,020
I mean, we're charging $1.2
million for the system,

1171
00:57:44,020 --> 00:57:46,420
but to replace it,
you'd have to spend

1172
00:57:46,420 --> 00:57:50,210
$1.3 plus $500,000 a year.

1173
00:57:50,210 --> 00:57:54,897
So in one sense, we are leaving
a little money on the table.

1174
00:57:54,897 --> 00:57:56,980
In another sense, you have
to leave a little money

1175
00:57:56,980 --> 00:58:00,350
on the table because these
are approximate calculations.

1176
00:58:00,350 --> 00:58:05,650
But the answer is, Husky's
systems justified their premium

1177
00:58:05,650 --> 00:58:09,430
price going into 1995.

1178
00:58:09,430 --> 00:58:12,940
The electricity savings
were not a trivial part

1179
00:58:12,940 --> 00:58:16,360
of the reason, at
least for PET preform.

1180
00:58:16,360 --> 00:58:18,580
Is this reasonably
straightforward,

1181
00:58:18,580 --> 00:58:20,860
how you would think
about doing it--

1182
00:58:20,860 --> 00:58:23,500
just engineer it one way,
engineer it the other way,

1183
00:58:23,500 --> 00:58:26,755
and check the costs,
all the costs?

1184
00:58:31,100 --> 00:58:33,320
We're now in 1995.

1185
00:58:33,320 --> 00:58:34,180
What's gone wrong?

1186
00:58:38,350 --> 00:58:39,333
It's the summer of '95.

1187
00:58:39,333 --> 00:58:40,250
They had a great year.

1188
00:58:40,250 --> 00:58:41,230
They're depressed.

1189
00:58:41,230 --> 00:58:42,180
Yes.

1190
00:58:42,180 --> 00:58:44,643
AUDIENCE: Resin
costs are increasing.

1191
00:58:44,643 --> 00:58:46,810
RICHARD SCHMALENSEE: OK,
resin costs are increasing.

1192
00:58:46,810 --> 00:58:50,110
That's leading to a
decrease in demand.

1193
00:58:50,110 --> 00:58:52,720
Is that likely to be a temporary
or a permanent situation,

1194
00:58:52,720 --> 00:58:53,770
do you think?

1195
00:58:53,770 --> 00:58:54,947
Temporary, yeah.

1196
00:58:54,947 --> 00:58:56,280
It's going to be disequilibrium.

1197
00:58:56,280 --> 00:58:57,310
We've seen it before.

1198
00:58:57,310 --> 00:58:58,900
It's a commodity chemical.

1199
00:58:58,900 --> 00:59:00,560
They just have a
capacity shortage.

1200
00:59:00,560 --> 00:59:04,430
So we wouldn't get too
twitchy about that.

1201
00:59:04,430 --> 00:59:05,937
Anything else, Matthew?

1202
00:59:05,937 --> 00:59:07,520
AUDIENCE: A lot of
competing companies

1203
00:59:07,520 --> 00:59:09,100
have noticed their
success and are

1204
00:59:09,100 --> 00:59:11,350
starting to step in and try
to take some market share.

1205
00:59:11,350 --> 00:59:13,100
RICHARD SCHMALENSEE:
Now we got a problem.

1206
00:59:13,100 --> 00:59:14,575
That's more serious.

1207
00:59:20,110 --> 00:59:22,750
And these guys have been
through resin shortages,

1208
00:59:22,750 --> 00:59:24,190
and they don't
have a lot of debt,

1209
00:59:24,190 --> 00:59:26,590
and they'll probably
get through this one.

1210
00:59:26,590 --> 00:59:30,700
In fact, I think it fixed
itself within a year, maybe two.

1211
00:59:30,700 --> 00:59:32,620
But the lower cost
competitors going

1212
00:59:32,620 --> 00:59:37,630
after your prime customers
with lower costs--

1213
00:59:37,630 --> 00:59:39,970
that's troublesome.

1214
00:59:39,970 --> 00:59:43,550
So let's look at this two ways.

1215
00:59:43,550 --> 00:59:47,500
Let's look at it from the point
of view first of a competitor.

1216
00:59:47,500 --> 00:59:50,950
Suppose you're one of
those low cost competitors.

1217
00:59:50,950 --> 00:59:53,890
You know Husky's
going to do something.

1218
00:59:53,890 --> 00:59:57,590
What do you think
Husky is going to do?

1219
00:59:57,590 --> 00:59:59,450
One question is
what will they do,

1220
00:59:59,450 --> 01:00:02,750
and what would you think they
would do as a competitor?

1221
01:00:02,750 --> 01:00:05,720
And the other is what would
you recommend they do?

1222
01:00:05,720 --> 01:00:09,740
Those may be the same if
they're as smart as you are.

1223
01:00:09,740 --> 01:00:12,860
But they may not be.

1224
01:00:12,860 --> 01:00:14,970
Any thoughts about
you're a competitor.

1225
01:00:14,970 --> 01:00:18,610
What do you think Husky does?

1226
01:00:18,610 --> 01:00:19,460
Sam.

1227
01:00:19,460 --> 01:00:20,860
AUDIENCE: Talk to
their customers

1228
01:00:20,860 --> 01:00:22,720
and stress the quality
of the product.

1229
01:00:22,720 --> 01:00:23,800
Because these guys
are new, and they're

1230
01:00:23,800 --> 01:00:25,130
doing low cost, but
the only way they

1231
01:00:25,130 --> 01:00:26,290
do that is they're
cutting corners.

1232
01:00:26,290 --> 01:00:27,640
Like, our product's
more expensive,

1233
01:00:27,640 --> 01:00:29,140
but you've worked
with us for years.

1234
01:00:29,140 --> 01:00:31,570
You know it's trustworthy,
and just [INAUDIBLE]

1235
01:00:31,570 --> 01:00:33,910
RICHARD SCHMALENSEE:
So you think what

1236
01:00:33,910 --> 01:00:35,590
they would do would be to--

1237
01:00:35,590 --> 01:00:39,400
because they've always
been about technology,

1238
01:00:39,400 --> 01:00:41,590
and technological
leadership, and quality,

1239
01:00:41,590 --> 01:00:43,835
they're just going to
double down on that.

1240
01:00:43,835 --> 01:00:45,460
They're going to do
more communication.

1241
01:00:45,460 --> 01:00:47,135
They're going to
do more innovation.

1242
01:00:47,135 --> 01:00:48,010
AUDIENCE: [INAUDIBLE]

1243
01:00:48,010 --> 01:00:49,210
RICHARD SCHMALENSEE: They're
going to ride the same horse.

1244
01:00:49,210 --> 01:00:51,220
AUDIENCE: That's what
I think they should do.

1245
01:00:51,220 --> 01:00:53,450
RICHARD SCHMALENSEE: What
do you think they will do?

1246
01:00:53,450 --> 01:00:55,408
AUDIENCE: Probably, I
feel like the first thing

1247
01:00:55,408 --> 01:00:57,670
they may try and do
is lower their costs,

1248
01:00:57,670 --> 01:00:59,054
drop their prices a little bit.

1249
01:00:59,054 --> 01:01:01,535
I don't think that's
what they should do,

1250
01:01:01,535 --> 01:01:02,960
but that's what [INAUDIBLE].

1251
01:01:02,960 --> 01:01:06,200
RICHARD SCHMALENSEE: Why do
you think they will do it?

1252
01:01:06,200 --> 01:01:07,160
You had me sold.

1253
01:01:07,160 --> 01:01:09,650
You had me sold that
given their whole culture,

1254
01:01:09,650 --> 01:01:12,680
and given the way the company's
been built, that they would

1255
01:01:12,680 --> 01:01:16,615
double down on innovation.

1256
01:01:16,615 --> 01:01:20,030
AUDIENCE: Yeah, I feel like it's
easier to lower [INAUDIBLE]..

1257
01:01:20,030 --> 01:01:22,530
RICHARD SCHMALENSEE: It's easier
to lower price in response.

1258
01:01:22,530 --> 01:01:24,090
AUDIENCE: I don't think
that's the right thing at all.

1259
01:01:24,090 --> 01:01:25,470
RICHARD SCHMALENSEE: Philip,
what do you think they will do?

1260
01:01:25,470 --> 01:01:27,710
AUDIENCE: They'll
probably lower the price,

1261
01:01:27,710 --> 01:01:34,370
because [INAUDIBLE] willingness
to pay of the buyers is

1262
01:01:34,370 --> 01:01:36,620
probably going to decrease
because of these low-cost

1263
01:01:36,620 --> 01:01:37,583
competitors--

1264
01:01:37,583 --> 01:01:39,000
RICHARD SCHMALENSEE:
Because what?

1265
01:01:39,000 --> 01:01:41,310
AUDIENCE: Because the
low-cost competitors arising.

1266
01:01:41,310 --> 01:01:47,970
So the cost of replacing their
product is less of an issue.

1267
01:01:51,290 --> 01:01:54,200
RICHARD SCHMALENSEE: So you
think if you're a competitor,

1268
01:01:54,200 --> 01:01:57,944
the first thing you expect
them to do is a price cut.

1269
01:01:57,944 --> 01:01:58,610
AUDIENCE: Yeah.

1270
01:01:58,610 --> 01:01:59,610
RICHARD SCHMALENSEE: OK.

1271
01:01:59,610 --> 01:02:00,380
OK.

1272
01:02:00,380 --> 01:02:02,620
Anybody else have any
expec-- because that's

1273
01:02:02,620 --> 01:02:05,500
the natural response to a
low-cost entrant is to come

1274
01:02:05,500 --> 01:02:09,820
down a bit anybody else?

1275
01:02:09,820 --> 01:02:10,490
David.

1276
01:02:10,490 --> 01:02:13,012
AUDIENCE: I would not expect
them to cut their prices,

1277
01:02:13,012 --> 01:02:14,220
just because that kills them.

1278
01:02:14,220 --> 01:02:16,332
That's like a
slippery slope thing,

1279
01:02:16,332 --> 01:02:18,790
where their customers will not
be willing to pay the higher

1280
01:02:18,790 --> 01:02:19,290
prices.

1281
01:02:19,290 --> 01:02:23,260
And they can't afford to sustain
their competitive advantage.

1282
01:02:23,260 --> 01:02:26,795
RICHARD SCHMALENSEE: Well, are
you saying what they should do

1283
01:02:26,795 --> 01:02:27,670
or what they will do?

1284
01:02:27,670 --> 01:02:31,215
AUDIENCE: I'm saying as someone,
as a competitor, especially

1285
01:02:31,215 --> 01:02:33,340
if I'm part of the larger
corporation like the Mann

1286
01:02:33,340 --> 01:02:37,410
Group, I would not expect
them to come down to my price,

1287
01:02:37,410 --> 01:02:41,233
rather they try to stay
high, maybe that person will

1288
01:02:41,233 --> 01:02:42,460
buy a little into--

1289
01:02:42,460 --> 01:02:46,300
RICHARD SCHMALENSEE: So you
think that Schad would say,

1290
01:02:46,300 --> 01:02:49,420
I can't play a price
game with these guys.

1291
01:02:49,420 --> 01:02:51,580
I'm going to play my long suit.

1292
01:02:51,580 --> 01:02:53,770
I'm going to stick with
technology, and high price,

1293
01:02:53,770 --> 01:02:56,170
and communication, and
all of those good things.

1294
01:02:56,170 --> 01:02:58,240
OK, we're going to get--

1295
01:03:02,004 --> 01:03:04,990
at least the analysis in the
teaching note on this case

1296
01:03:04,990 --> 01:03:08,350
says, given what Schad did
to get through the '70s,

1297
01:03:08,350 --> 01:03:11,440
you might expect him to
double down on technology,

1298
01:03:11,440 --> 01:03:13,090
to keep innovating.

1299
01:03:13,090 --> 01:03:15,160
But what should he do?

1300
01:03:15,160 --> 01:03:19,250
I mean, there are a whole
set of things he could do.

1301
01:03:19,250 --> 01:03:21,053
He could cut prices.

1302
01:03:21,053 --> 01:03:22,220
He could cut them generally.

1303
01:03:22,220 --> 01:03:23,560
He could cut them selectively.

1304
01:03:23,560 --> 01:03:25,480
He could cut them in
different markets.

1305
01:03:25,480 --> 01:03:27,670
He could cut them in
different segments.

1306
01:03:27,670 --> 01:03:30,630
He could enter their segments.

1307
01:03:30,630 --> 01:03:33,460
Husky is a little small in
terms of production capacity.

1308
01:03:33,460 --> 01:03:37,910
They might try to get
scaled by counterattacking.

1309
01:03:37,910 --> 01:03:41,350
They could cut
costs given they're

1310
01:03:41,350 --> 01:03:43,780
facing low-price
competition, but they've

1311
01:03:43,780 --> 01:03:48,410
got this culture that's
not a cost-focused culture.

1312
01:03:48,410 --> 01:03:51,650
It's a quality-focused,
people-focused culture.

1313
01:03:51,650 --> 01:03:58,910
So if you do that,
then for sure Charlotte

1314
01:03:58,910 --> 01:04:01,190
won't want to work
there, because not only

1315
01:04:01,190 --> 01:04:04,040
do they straighten your T,
they cut out child care.

1316
01:04:04,040 --> 01:04:07,460
They do all kinds of
other things to cut costs.

1317
01:04:07,460 --> 01:04:11,120
You could either raise or lower
all this stuff-- the service,

1318
01:04:11,120 --> 01:04:12,633
the technical
people in the field.

1319
01:04:12,633 --> 01:04:14,300
They've got probably
a high-priced sales

1320
01:04:14,300 --> 01:04:16,430
force because they're
all technical people.

1321
01:04:16,430 --> 01:04:19,460
You could go back to
plain, old salespeople.

1322
01:04:19,460 --> 01:04:22,730
You could cut out this
advanced manufacturing center,

1323
01:04:22,730 --> 01:04:24,140
which nobody else has got.

1324
01:04:24,140 --> 01:04:25,640
You could stop
working on research,

1325
01:04:25,640 --> 01:04:29,120
or you could do more
of all of those.

1326
01:04:29,120 --> 01:04:30,260
Whoa, that was cute--

1327
01:04:32,930 --> 01:04:33,860
bad button.

1328
01:04:33,860 --> 01:04:37,190
You could decide
that there really

1329
01:04:37,190 --> 01:04:40,222
are scale economies in
building your own inputs

1330
01:04:40,222 --> 01:04:41,180
instead of buying them.

1331
01:04:41,180 --> 01:04:44,330
You could try to
integrate upstream.

1332
01:04:44,330 --> 01:04:47,450
Or you could do things
I haven't thought of.

1333
01:04:47,450 --> 01:04:51,410
So instead of what would
they do, what should they do?

1334
01:04:51,410 --> 01:04:53,780
Sam, you had were
doing a should.

1335
01:04:53,780 --> 01:04:54,765
You were saying--

1336
01:04:54,765 --> 01:04:57,140
AUDIENCE: I was saying they
should focus on communicating

1337
01:04:57,140 --> 01:04:58,770
advantage to customers.

1338
01:04:58,770 --> 01:05:04,770
And I also think they
probably should raise spending

1339
01:05:04,770 --> 01:05:06,323
on technology.

1340
01:05:06,323 --> 01:05:08,240
RICHARD SCHMALENSEE: And
quality and all that.

1341
01:05:08,240 --> 01:05:08,750
AUDIENCE: Yeah.

1342
01:05:08,750 --> 01:05:11,125
RICHARD SCHMALENSEE: Because
that's what they're good at.

1343
01:05:11,125 --> 01:05:11,660
OK.

1344
01:05:11,660 --> 01:05:13,270
Max, where are you going?

1345
01:05:13,270 --> 01:05:15,395
AUDIENCE: I think they
should do an analysis of who

1346
01:05:15,395 --> 01:05:16,520
their main customers are.

1347
01:05:16,520 --> 01:05:18,410
And they only make a
couple 100 machines a year.

1348
01:05:18,410 --> 01:05:19,952
So if all of those
machines are going

1349
01:05:19,952 --> 01:05:21,917
to the same customers
or similar customers

1350
01:05:21,917 --> 01:05:23,500
and they can probably
bank on loyalty,

1351
01:05:23,500 --> 01:05:26,780
then they should focus on
communicating the advantages

1352
01:05:26,780 --> 01:05:28,110
because they can sell that.

1353
01:05:28,110 --> 01:05:29,990
But if a lot of
those machines are

1354
01:05:29,990 --> 01:05:33,410
going to new companies that are
trying to look to reduce costs

1355
01:05:33,410 --> 01:05:35,510
initially, then they
might want to think

1356
01:05:35,510 --> 01:05:38,490
about cutting costs to stay
competitive in that market.

1357
01:05:38,490 --> 01:05:40,282
RICHARD SCHMALENSEE:
So that's interesting.

1358
01:05:40,282 --> 01:05:42,230
So if it's the same
customers, then it's

1359
01:05:42,230 --> 01:05:46,010
an advantage to the customer
to have only one supplier,

1360
01:05:46,010 --> 01:05:48,720
to have Husky
machines throughout.

1361
01:05:48,720 --> 01:05:52,340
So if the growth is coming from
sales to customers that already

1362
01:05:52,340 --> 01:05:56,660
have Husky machines, you could
stress the fact that look,

1363
01:05:56,660 --> 01:05:57,732
you've got one supplier.

1364
01:05:57,732 --> 01:05:59,690
You've only got to have
one set of spare ports.

1365
01:05:59,690 --> 01:06:02,700
You've only got to call one
person when it breaks down.

1366
01:06:02,700 --> 01:06:04,383
Be a Husky shop.

1367
01:06:04,383 --> 01:06:06,050
But you're right--
it might be different

1368
01:06:06,050 --> 01:06:09,890
if they were new people and they
worry more about upfront cost.

1369
01:06:09,890 --> 01:06:10,940
OK.

1370
01:06:10,940 --> 01:06:11,720
Anybody else?

1371
01:06:11,720 --> 01:06:13,100
Any other approaches?

1372
01:06:13,100 --> 01:06:14,558
Erica.

1373
01:06:14,558 --> 01:06:17,780
AUDIENCE: Would it be unusual
to look into cutting costs

1374
01:06:17,780 --> 01:06:19,460
while maintaining quality?

1375
01:06:19,460 --> 01:06:23,740
So I guess investing
research into cutting cost

1376
01:06:23,740 --> 01:06:26,400
but maintaining high quality.

1377
01:06:26,400 --> 01:06:27,870
RICHARD SCHMALENSEE:
Well, can you

1378
01:06:27,870 --> 01:06:32,045
cut manufacturing costs or you
cut out the daycare center?

1379
01:06:32,045 --> 01:06:33,420
You wouldn't cut
out the daycare.

1380
01:06:33,420 --> 01:06:34,128
AUDIENCE: No, no.

1381
01:06:34,128 --> 01:06:36,750
[INAUDIBLE] manufacturing costs,
like how to produce things

1382
01:06:36,750 --> 01:06:38,250
more efficiently.

1383
01:06:38,250 --> 01:06:41,160
RICHARD SCHMALENSEE: So you'd
focus on manufacturing costs.

1384
01:06:41,160 --> 01:06:44,190
Would you also raise--

1385
01:06:44,190 --> 01:06:47,130
this is a fair amount
of cost in here,

1386
01:06:47,130 --> 01:06:49,170
having this high-priced
field force,

1387
01:06:49,170 --> 01:06:51,810
this advanced manufacturing
center, the spending

1388
01:06:51,810 --> 01:06:52,900
on innovation.

1389
01:06:52,900 --> 01:06:54,070
That's a cost.

1390
01:06:54,070 --> 01:06:57,300
Would you cut costs
there or would you

1391
01:06:57,300 --> 01:07:01,480
cut costs to focus on
manufacturing cost?

1392
01:07:01,480 --> 01:07:05,700
AUDIENCE: I mean, I
guess I was focusing

1393
01:07:05,700 --> 01:07:07,910
on manufacturing costs.

1394
01:07:07,910 --> 01:07:08,570
I mean, those--

1395
01:07:08,570 --> 01:07:10,320
RICHARD SCHMALENSEE:
Daycare center stays,

1396
01:07:10,320 --> 01:07:14,160
but we're going to really
try to get these things built

1397
01:07:14,160 --> 01:07:15,075
more cheaply.

1398
01:07:15,075 --> 01:07:15,700
AUDIENCE: Yeah.

1399
01:07:15,700 --> 01:07:16,700
RICHARD SCHMALENSEE: OK.

1400
01:07:16,700 --> 01:07:22,560
And then would you use
that to cut prices?

1401
01:07:22,560 --> 01:07:24,570
AUDIENCE: You could.

1402
01:07:24,570 --> 01:07:28,515
I mean, if cutting prices
reflects lower quality--

1403
01:07:28,515 --> 01:07:30,140
RICHARD SCHMALENSEE:
That would be bad.

1404
01:07:30,140 --> 01:07:30,765
AUDIENCE: Yeah.

1405
01:07:30,765 --> 01:07:34,380
But you could also
stress that you have

1406
01:07:34,380 --> 01:07:37,767
better quality machines or--

1407
01:07:37,767 --> 01:07:39,100
RICHARD SCHMALENSEE: Jacqueline.

1408
01:07:39,100 --> 01:07:40,860
AUDIENCE: I was going to say I
agree with that, that you could

1409
01:07:40,860 --> 01:07:43,320
use that to cut prices,
but at the same time still

1410
01:07:43,320 --> 01:07:46,360
highlight the quality of the
product and that advantage.

1411
01:07:46,360 --> 01:07:49,520
You could do both strategies.

1412
01:07:49,520 --> 01:07:51,200
RICHARD SCHMALENSEE: OK.

1413
01:07:51,200 --> 01:07:53,840
Anybody has-- yeah.

1414
01:07:53,840 --> 01:07:56,830
AUDIENCE: I'd say increased
services at point of purchase,

1415
01:07:56,830 --> 01:08:01,520
so they offer free installation
or servicing of full Husky

1416
01:08:01,520 --> 01:08:04,415
machines or whenever you buy new
ones, or something like that,

1417
01:08:04,415 --> 01:08:06,290
to focus when they're
going to buy a machine,

1418
01:08:06,290 --> 01:08:07,832
they're going to
have it for a while.

1419
01:08:07,832 --> 01:08:09,530
So focus right on that point.

1420
01:08:09,530 --> 01:08:12,140
RICHARD SCHMALENSEE: So
that's costing me money.

1421
01:08:12,140 --> 01:08:13,910
So how am I going
to get it back?

1422
01:08:13,910 --> 01:08:15,606
Or am I not?

1423
01:08:15,606 --> 01:08:17,532
AUDIENCE: Customer
loyalty-- you're

1424
01:08:17,532 --> 01:08:18,740
going to sell those machines.

1425
01:08:18,740 --> 01:08:20,990
I guess you have to weigh
that kind of back and forth,

1426
01:08:20,990 --> 01:08:22,115
but hopefully end positive.

1427
01:08:22,115 --> 01:08:24,282
RICHARD SCHMALENSEE: Yeah,
I mean, one approach here

1428
01:08:24,282 --> 01:08:25,490
is to say, "Game over."

1429
01:08:25,490 --> 01:08:28,470
I made a lot of money before
people came into my segment,

1430
01:08:28,470 --> 01:08:31,170
and I'm not going to make
that kind of money again.

1431
01:08:31,170 --> 01:08:33,410
So what I want to
make sure is that I

1432
01:08:33,410 --> 01:08:36,590
maintain a position through
high service and whatever,

1433
01:08:36,590 --> 01:08:37,830
and don't get swamped.

1434
01:08:37,830 --> 01:08:40,850
I kind of niche myself
even a little more.

1435
01:08:40,850 --> 01:08:41,950
Charlotte.

1436
01:08:41,950 --> 01:08:44,120
AUDIENCE: Well,
I think that they

1437
01:08:44,120 --> 01:08:46,680
are a very different company
than their competitors.

1438
01:08:46,680 --> 01:08:49,619
They're focusing on this kind
of assembly line manufacturing

1439
01:08:49,619 --> 01:08:51,500
that allows them to
specialize products

1440
01:08:51,500 --> 01:08:52,862
for what their consumer wants.

1441
01:08:52,862 --> 01:08:55,279
So they can focus on that, and
even take that a little bit

1442
01:08:55,279 --> 01:08:55,779
further.

1443
01:08:55,779 --> 01:08:58,580
And maybe if there's a
huge price difference

1444
01:08:58,580 --> 01:09:00,680
than what their competitors
are now charging

1445
01:09:00,680 --> 01:09:02,870
to modify their machines.

1446
01:09:02,870 --> 01:09:04,463
And what they have
been charging,

1447
01:09:04,463 --> 01:09:06,380
they could cut price a
little so they're still

1448
01:09:06,380 --> 01:09:13,407
a high quality company, higher,
more luxury, but not as much.

1449
01:09:13,407 --> 01:09:15,740
Because they were charging
really, really high premiums,

1450
01:09:15,740 --> 01:09:16,240
too.

1451
01:09:16,240 --> 01:09:17,779
They could just change that.

1452
01:09:17,779 --> 01:09:18,870
RICHARD SCHMALENSEE: They
could come down a bit.

1453
01:09:18,870 --> 01:09:20,490
I mean, although
the premiums seem

1454
01:09:20,490 --> 01:09:23,007
to be justified based
on that analysis.

1455
01:09:23,007 --> 01:09:23,840
Everybody over here?

1456
01:09:23,840 --> 01:09:25,010
Pedro.

1457
01:09:25,010 --> 01:09:26,479
I tend to look left.

1458
01:09:26,479 --> 01:09:29,696
So you need to wave your hand.

1459
01:09:29,696 --> 01:09:31,279
AUDIENCE: At the
beginning, I was also

1460
01:09:31,279 --> 01:09:34,279
thinking of the manufacturing
costs of the machines.

1461
01:09:34,279 --> 01:09:38,790
Are those more energy efficient?

1462
01:09:38,790 --> 01:09:41,084
So that's [INAUDIBLE]
production costs.

1463
01:09:41,084 --> 01:09:42,359
That's what I was thinking.

1464
01:09:42,359 --> 01:09:45,040
But then I was also
thinking, just thought

1465
01:09:45,040 --> 01:09:47,200
of maybe expanding the
market a little bit.

1466
01:09:49,779 --> 01:09:57,220
Because the other companies
produce more types of plastics.

1467
01:09:57,220 --> 01:10:00,220
RICHARD SCHMALENSEE: So maybe
go into some other segments, OK.

1468
01:10:00,220 --> 01:10:03,880
Let me give you a few thoughts.

1469
01:10:03,880 --> 01:10:06,850
They have a lot of choices here.

1470
01:10:06,850 --> 01:10:10,360
And it's interesting.

1471
01:10:10,360 --> 01:10:13,120
Looking at this whole menu,
one of the things I must

1472
01:10:13,120 --> 01:10:16,730
say that struck
me is before 1995,

1473
01:10:16,730 --> 01:10:21,580
this is a great example of how
all the pieces fit together.

1474
01:10:21,580 --> 01:10:23,230
They focused on a segment.

1475
01:10:23,230 --> 01:10:25,090
They figured out
that that segment

1476
01:10:25,090 --> 01:10:26,860
cares about performance.

1477
01:10:26,860 --> 01:10:29,800
They're all about performance
and technical excellence.

1478
01:10:29,800 --> 01:10:32,620
They got a culture
that fits with that.

1479
01:10:32,620 --> 01:10:34,360
All the pieces fit together.

1480
01:10:34,360 --> 01:10:35,800
It's IKEA.

1481
01:10:35,800 --> 01:10:39,550
It's Southwest Airlines.

1482
01:10:39,550 --> 01:10:43,490
And comes now this
difficult time.

1483
01:10:43,490 --> 01:10:45,800
Can you make the
things fit together?

1484
01:10:45,800 --> 01:10:48,280
So a couple of choices--

1485
01:10:48,280 --> 01:10:51,400
their basic options-- I
mean, you can try to can try

1486
01:10:51,400 --> 01:10:52,870
to increase--

1487
01:10:52,870 --> 01:10:54,970
Netstal is one of the
entrants, you will recall.

1488
01:10:54,970 --> 01:10:58,870
You can try to increase
willingness to pay.

1489
01:10:58,870 --> 01:11:02,740
You can think
about more service,

1490
01:11:02,740 --> 01:11:06,580
more R&D. The question
Schad has to ask himself,

1491
01:11:06,580 --> 01:11:11,020
one of the questions, is,
is there room for that?

1492
01:11:11,020 --> 01:11:16,220
Differentiation makes you
money if it's cost effective.

1493
01:11:16,220 --> 01:11:18,730
So the question is,
how much more service--

1494
01:11:18,730 --> 01:11:21,010
what would you get
from increased service?

1495
01:11:21,010 --> 01:11:25,000
The question of thinking
about who your customers are--

1496
01:11:25,000 --> 01:11:26,230
are they repeat?

1497
01:11:26,230 --> 01:11:27,850
Is this the same
people expanding?

1498
01:11:27,850 --> 01:11:29,440
Is it new people?

1499
01:11:29,440 --> 01:11:32,080
What's the return to that?

1500
01:11:32,080 --> 01:11:34,240
You could improve
the cost position.

1501
01:11:34,240 --> 01:11:36,040
Remember these two
basic approaches--

1502
01:11:36,040 --> 01:11:38,080
you can differentiate,
you can lower cost.

1503
01:11:41,440 --> 01:11:44,590
Can you cut cost
and still deliver?

1504
01:11:44,590 --> 01:11:47,170
If you cut the perks,
cut the sales force,

1505
01:11:47,170 --> 01:11:48,670
will you affect the culture?

1506
01:11:48,670 --> 01:11:52,870
Can you continue to deliver if
you do an aggressive cost cut?

1507
01:11:52,870 --> 01:11:53,997
And you can cut margins.

1508
01:11:53,997 --> 01:11:55,330
They've got pretty good margins.

1509
01:11:55,330 --> 01:11:56,663
They've got room to cut margins.

1510
01:12:00,490 --> 01:12:05,950
But to become the low-cost
producer-- probably not.

1511
01:12:05,950 --> 01:12:08,050
They could go after
other segments.

1512
01:12:08,050 --> 01:12:09,790
They only serve part
of the business.

1513
01:12:09,790 --> 01:12:12,430
They could grow by
going to other segments.

1514
01:12:12,430 --> 01:12:14,200
But given that they're
a high-cost company

1515
01:12:14,200 --> 01:12:16,990
and have a particular culture,
the question you'd have to ask

1516
01:12:16,990 --> 01:12:19,060
is, does that fit?

1517
01:12:19,060 --> 01:12:22,320
Can we do that?

1518
01:12:22,320 --> 01:12:28,390
And then you'd like the
whole package to fit.

1519
01:12:28,390 --> 01:12:31,510
And at this point,
how old was Schad?

1520
01:12:31,510 --> 01:12:35,080
Schad was 67 in 1995.

1521
01:12:35,080 --> 01:12:38,710
So someone in that age
bracket, let me just say--

1522
01:12:38,710 --> 01:12:42,460
he obviously has to think
about what am I handing off?

1523
01:12:42,460 --> 01:12:44,843
Am I going to create something
that's going to go on?

1524
01:12:44,843 --> 01:12:46,510
Because he's not going
to be leading it.

1525
01:12:46,510 --> 01:12:49,600
Well, one assumes he's not going
to be an active participant

1526
01:12:49,600 --> 01:12:52,130
for another 20 years.

1527
01:12:52,130 --> 01:12:59,320
So what he did was
actually quite drastic.

1528
01:13:02,347 --> 01:13:04,180
I don't know whether
this is right or wrong,

1529
01:13:04,180 --> 01:13:05,740
but this is what he did.

1530
01:13:05,740 --> 01:13:08,470
They went into other niches.

1531
01:13:08,470 --> 01:13:09,730
They moved out.

1532
01:13:09,730 --> 01:13:12,040
They increased their
manufacturing capacity

1533
01:13:12,040 --> 01:13:12,850
substantially.

1534
01:13:12,850 --> 01:13:15,160
They thought they were
too small for scale,

1535
01:13:15,160 --> 01:13:17,050
so they added capacity.

1536
01:13:17,050 --> 01:13:22,760
They cut prices dramatically in
response to low-price entrants.

1537
01:13:22,760 --> 01:13:24,380
Probably isn't going
to keep them out.

1538
01:13:24,380 --> 01:13:27,260
They worked to cut costs.

1539
01:13:27,260 --> 01:13:29,720
Cutting prices, it
was argued, was a way

1540
01:13:29,720 --> 01:13:34,590
to put pressure on costs and
hope you can keep the culture.

1541
01:13:34,590 --> 01:13:36,480
You basically say to
your people, look,

1542
01:13:36,480 --> 01:13:38,400
we're getting killed on price.

1543
01:13:38,400 --> 01:13:40,482
We've got a match,
and the only way

1544
01:13:40,482 --> 01:13:42,690
we're going to make any
money is if we can find a way

1545
01:13:42,690 --> 01:13:44,070
to get the cost down.

1546
01:13:44,070 --> 01:13:48,540
But they didn't decrease
R&D. They didn't decrease

1547
01:13:48,540 --> 01:13:50,760
the manufacturing center.

1548
01:13:50,760 --> 01:13:52,680
They didn't decrease
the sales force.

1549
01:13:52,680 --> 01:13:57,300
They began to build
more in-house.

1550
01:13:57,300 --> 01:14:03,960
And they had an IPO, sold
off the company in 1968.

1551
01:14:03,960 --> 01:14:05,850
How well do you think
this package worked?

1552
01:14:09,350 --> 01:14:11,455
Say in words-- not so well.

1553
01:14:11,455 --> 01:14:12,080
AUDIENCE: Yeah.

1554
01:14:12,080 --> 01:14:14,150
I mean, also in
hindsight, I would

1555
01:14:14,150 --> 01:14:18,970
argue that if you'd have an
organization in the [INAUDIBLE]

1556
01:14:18,970 --> 01:14:20,000
as well.

1557
01:14:20,000 --> 01:14:22,000
So I would argue that the
low-cost manufacturers

1558
01:14:22,000 --> 01:14:26,560
in the US get undercut
by Chinese manufacturers.

1559
01:14:26,560 --> 01:14:28,610
And the best way
to stay competitive

1560
01:14:28,610 --> 01:14:31,607
was to stay high
cost, high quality.

1561
01:14:31,607 --> 01:14:32,690
RICHARD SCHMALENSEE: Yeah.

1562
01:14:32,690 --> 01:14:35,420
I mean, it's a curious
mixture, isn't it?

1563
01:14:35,420 --> 01:14:39,860
Because the company was built
for high cost, high quality.

1564
01:14:39,860 --> 01:14:45,140
And they tried to
position themselves

1565
01:14:45,140 --> 01:14:51,740
as the high cost, high quality
firm across the market in all

1566
01:14:51,740 --> 01:14:55,220
of these niches, even though
in a bunch of the niches,

1567
01:14:55,220 --> 01:14:58,770
quality wasn't that important.

1568
01:14:58,770 --> 01:15:04,920
So I've seen numbers
through 1999,

1569
01:15:04,920 --> 01:15:07,500
and they continue to grow
because the business grew.

1570
01:15:07,500 --> 01:15:10,680
Their profitability
was not terrific.

1571
01:15:10,680 --> 01:15:14,190
It was pretty erratic because
they're changing the company

1572
01:15:14,190 --> 01:15:16,180
rather dramatically.

1573
01:15:16,180 --> 01:15:17,940
And you can't get
any more numbers

1574
01:15:17,940 --> 01:15:20,560
because they went
private last year.

1575
01:15:20,560 --> 01:15:23,760
So their website now is
just an advertisement

1576
01:15:23,760 --> 01:15:24,693
for their technology.

1577
01:15:24,693 --> 01:15:26,610
There are no numbers
available because they're

1578
01:15:26,610 --> 01:15:29,350
a privately held company.

1579
01:15:29,350 --> 01:15:32,370
They're still in
Bolton, Ontario.

1580
01:15:32,370 --> 01:15:36,320
Questions, comments,
reactions, thoughts?

1581
01:15:36,320 --> 01:15:37,040
Yeah.

1582
01:15:37,040 --> 01:15:39,560
AUDIENCE: Did they go private
by some sort of buyout

1583
01:15:39,560 --> 01:15:42,552
because of poor performance?

1584
01:15:42,552 --> 01:15:44,510
RICHARD SCHMALENSEE:
Their website doesn't say,

1585
01:15:44,510 --> 01:15:48,080
we went private because
we were performing poorly.

1586
01:15:48,080 --> 01:15:50,720
The website just says, such
and such a private equity firm

1587
01:15:50,720 --> 01:15:52,550
bought them.

1588
01:15:52,550 --> 01:15:56,000
I don't think that's
implausible, but I don't know.

1589
01:15:56,000 --> 01:15:58,790
It's not implausible
that this strategy--

1590
01:15:58,790 --> 01:16:03,590
that a private equity firm
said this strategy is a loser,

1591
01:16:03,590 --> 01:16:05,420
and we can make this
firm more profitable

1592
01:16:05,420 --> 01:16:06,540
by changing strategy.

1593
01:16:06,540 --> 01:16:08,180
But I don't know that.

1594
01:16:08,180 --> 01:16:10,840
OK, see you all next time.