WEBVTT 00:00:00.000 --> 00:00:02.520 The following content is provided under a Creative 00:00:02.520 --> 00:00:03.950 Commons license. 00:00:03.950 --> 00:00:06.360 Your support will help MIT OpenCourseWare 00:00:06.360 --> 00:00:10.660 continue to offer high quality educational resources for free. 00:00:10.660 --> 00:00:13.320 To make a donation or view additional materials 00:00:13.320 --> 00:00:17.190 from hundreds of MIT courses, visit MIT OpenCourseWare 00:00:17.190 --> 00:00:18.370 at ocw.mit.edu. 00:00:25.810 --> 00:00:27.707 RICHARD SCHMALENSEE: So today what 00:00:27.707 --> 00:00:29.290 we're going to talk about, we're going 00:00:29.290 --> 00:00:34.240 to move from the descriptive discussions 00:00:34.240 --> 00:00:37.030 of organizational decision-making 00:00:37.030 --> 00:00:39.430 to a couple of prescriptive sessions, which 00:00:39.430 --> 00:00:43.730 is if you're running an energy business, how do you do it? 00:00:43.730 --> 00:00:45.790 One of the things, as this indicates 00:00:45.790 --> 00:00:47.500 that we talked about you should do, 00:00:47.500 --> 00:00:49.630 you should be doing present value analysis, 00:00:49.630 --> 00:00:53.440 net present value analysis of investment opportunities. 00:00:53.440 --> 00:00:55.470 But that's not strategy. 00:00:55.470 --> 00:00:57.430 So today and next time, we're going 00:00:57.430 --> 00:01:00.070 to be talking about strategy. 00:01:00.070 --> 00:01:03.580 We'll talk about industry attractiveness briefly, 00:01:03.580 --> 00:01:07.270 kinds of strategies and niches within industries, and then 00:01:07.270 --> 00:01:09.700 the Husky case. 00:01:09.700 --> 00:01:13.990 Wednesday, Don Lessard's going to be here and explore with you 00:01:13.990 --> 00:01:19.340 business models, particularly in innovative segments. 00:01:19.340 --> 00:01:23.740 So project by project, net present value isn't strategy. 00:01:23.740 --> 00:01:29.510 If a firm accepts every proposal with a net present value, 00:01:29.510 --> 00:01:31.840 a positive net present value, the result 00:01:31.840 --> 00:01:36.460 is likely to be very incoherent and unmanageable. 00:01:36.460 --> 00:01:43.300 The Brealey piece is sort of a finance person's skepticism. 00:01:43.300 --> 00:01:45.490 The first thing you note is you only 00:01:45.490 --> 00:01:49.450 see proposals with positive net present value. 00:01:49.450 --> 00:01:51.430 If someone likes a project, it turns out 00:01:51.430 --> 00:01:53.110 it has a positive net present value. 00:01:55.650 --> 00:02:00.060 So what they propose, and we'll explore a little bit, 00:02:00.060 --> 00:02:06.180 is thinking about disequilibria, thinking about will it last. 00:02:06.180 --> 00:02:08.430 It has a net present value because we're 00:02:08.430 --> 00:02:09.600 cheaper than they are. 00:02:09.600 --> 00:02:12.180 OK, why are we cheaper than they are? 00:02:12.180 --> 00:02:14.340 We can buy materials more cheaply than they. 00:02:14.340 --> 00:02:14.970 Why? 00:02:14.970 --> 00:02:15.960 Will it last? 00:02:15.960 --> 00:02:17.520 Will it last? 00:02:17.520 --> 00:02:21.660 Annika and I saw, before vacation, 00:02:21.660 --> 00:02:24.900 a very detailed analysis of US versus Chinese 00:02:24.900 --> 00:02:27.510 photovoltaic manufacturing costs. 00:02:27.510 --> 00:02:29.400 It concluded that the big Chinese advantage 00:02:29.400 --> 00:02:33.210 was they could get materials and supplies 25% cheaper. 00:02:33.210 --> 00:02:36.090 And the first question is, why? 00:02:36.090 --> 00:02:37.827 Is that going to last? 00:02:37.827 --> 00:02:39.660 The people who'd done the study hadn't quite 00:02:39.660 --> 00:02:44.430 inquired into that, and said it was superior bargaining power. 00:02:44.430 --> 00:02:47.160 Superior bargaining power doesn't last. 00:02:47.160 --> 00:02:50.970 So first point in the Brealey et al. piece 00:02:50.970 --> 00:02:54.180 is skepticism about present value. 00:02:54.180 --> 00:02:57.570 Porter's paper is in a way more profound, 00:02:57.570 --> 00:03:01.020 and really does deserve a serious read. 00:03:01.020 --> 00:03:05.160 Strategy is what you won't do. 00:03:05.160 --> 00:03:08.010 What is it you won't do as a company? 00:03:08.010 --> 00:03:10.050 Someone walks in the door with a project 00:03:10.050 --> 00:03:12.810 with a positive net present value. 00:03:12.810 --> 00:03:15.540 When do you just say, no, you're right, 00:03:15.540 --> 00:03:17.100 that's a positive net present value. 00:03:17.100 --> 00:03:18.142 We're not going to do it. 00:03:20.910 --> 00:03:24.120 The argument is this-- 00:03:24.120 --> 00:03:28.480 if you're doing the same thing your competitors are, and there 00:03:28.480 --> 00:03:30.480 are a bunch of them, you're in a wonderful world 00:03:30.480 --> 00:03:31.530 of perfect competition. 00:03:31.530 --> 00:03:33.090 We all enjoy that. 00:03:33.090 --> 00:03:34.350 It's in the textbooks. 00:03:34.350 --> 00:03:35.730 It's easy to analyze. 00:03:35.730 --> 00:03:37.800 And it's no fun. 00:03:37.800 --> 00:03:40.740 You don't make any money, particularly if there 00:03:40.740 --> 00:03:42.300 are opportunities to innovate. 00:03:42.300 --> 00:03:47.010 You have to innovate just to cover your cost of capital. 00:03:47.010 --> 00:03:50.670 There's a little quote from Warren Buffett, which 00:03:50.670 --> 00:03:54.000 I think still holds true, that since the dawn of aviation 00:03:54.000 --> 00:03:58.650 the total profits earned by airlines adds up to zero. 00:03:58.650 --> 00:04:02.080 Airlines have gotten enormously more efficient. 00:04:02.080 --> 00:04:04.830 They've done enormous things for transportation 00:04:04.830 --> 00:04:06.600 for the country as a whole, but they 00:04:06.600 --> 00:04:10.110 haven't made any money, because mostly they're 00:04:10.110 --> 00:04:12.330 all doing the same thing. 00:04:12.330 --> 00:04:13.830 And there are a bunch of them. 00:04:13.830 --> 00:04:17.490 And there's no differentiation or stickiness. 00:04:17.490 --> 00:04:21.540 So the first lesson is, if you're 00:04:21.540 --> 00:04:25.710 running a company you don't want to be there. 00:04:25.710 --> 00:04:29.010 As Porter points out, if you're in that situation-- 00:04:29.010 --> 00:04:31.230 I mean, airlines have improved efficiency enormously 00:04:31.230 --> 00:04:32.370 over the years. 00:04:32.370 --> 00:04:33.570 Fuel costs are down. 00:04:33.570 --> 00:04:35.790 Electronic reservation systems, baggage 00:04:35.790 --> 00:04:38.167 handling-- much more efficient than they used to be, 00:04:38.167 --> 00:04:39.750 and they're still not making any money 00:04:39.750 --> 00:04:42.250 because they're all doing it. 00:04:42.250 --> 00:04:44.790 And if you don't innovate and improve, you lose. 00:04:44.790 --> 00:04:45.752 Andrew? 00:04:45.752 --> 00:04:47.110 AUDIENCE: I was just-- 00:04:47.110 --> 00:04:49.210 RICHARD SCHMALENSEE: Just drying your nail polish? 00:04:49.210 --> 00:04:51.760 OK, good. 00:04:51.760 --> 00:04:54.610 It's important to have it dry. 00:04:54.610 --> 00:05:00.810 So lesson one is you don't want to do that. 00:05:00.810 --> 00:05:03.900 Lesson two is sort of the obvious counterpoint, which 00:05:03.900 --> 00:05:06.000 is when you set up a business, you'd 00:05:06.000 --> 00:05:09.990 like to be doing something that's of value to somebody 00:05:09.990 --> 00:05:12.690 that can't be easily imitated. 00:05:12.690 --> 00:05:16.060 The buzzword is "sustainable advantage." 00:05:16.060 --> 00:05:19.770 So the notion that Chinese photovoltaics will always 00:05:19.770 --> 00:05:22.740 be cheaper because Chinese bargaining power 00:05:22.740 --> 00:05:27.000 enables them to get silicon 25% cheaper than US firms-- 00:05:27.000 --> 00:05:28.920 that doesn't wash. 00:05:28.920 --> 00:05:32.320 If that's what's going on, that's not sustainable. 00:05:32.320 --> 00:05:35.400 If there is some cost advantage in silicon production, 00:05:35.400 --> 00:05:36.570 that's more interesting. 00:05:36.570 --> 00:05:39.030 But if all you know is it's cheaper, 00:05:39.030 --> 00:05:44.170 and all you hear is "bargaining power," that's not sustainable. 00:05:44.170 --> 00:05:47.640 So if strategy is what you don't do, 00:05:47.640 --> 00:05:50.640 and it needs to be something that can't easily be imitated, 00:05:50.640 --> 00:05:53.250 how about the question I posed there-- 00:05:53.250 --> 00:05:54.420 does MIT have a strategy? 00:05:58.250 --> 00:06:00.170 If so, what is it? 00:06:00.170 --> 00:06:03.020 Or what are elements of it? 00:06:03.020 --> 00:06:03.875 Yeah. 00:06:03.875 --> 00:06:05.180 AUDIENCE: Hands-on learning. 00:06:05.180 --> 00:06:06.980 RICHARD SCHMALENSEE: Hands-on learning. 00:06:06.980 --> 00:06:08.270 OK, what does that rule out? 00:06:11.000 --> 00:06:14.702 It's an element of what MIT is about, absolutely. 00:06:14.702 --> 00:06:19.750 AUDIENCE: [INAUDIBLE] You have to limit the amount of people 00:06:19.750 --> 00:06:21.530 that you let in, because you can't 00:06:21.530 --> 00:06:24.400 have 50,000 people [INAUDIBLE]. 00:06:24.400 --> 00:06:25.450 RICHARD SCHMALENSEE: OK. 00:06:25.450 --> 00:06:28.280 So it's a high cost strategy. 00:06:28.280 --> 00:06:32.560 What does it say about the kinds of things you teach? 00:06:32.560 --> 00:06:34.877 Medical school has hands-on learning. 00:06:34.877 --> 00:06:36.460 And MIT doesn't have a medical school. 00:06:41.940 --> 00:06:45.090 Simpler question-- Caroline, what's Wellesley's strategy? 00:06:45.090 --> 00:06:48.120 Does Wellesley have a strategy? 00:06:48.120 --> 00:06:49.830 AUDIENCE: Yeah, to educate women. 00:06:49.830 --> 00:06:52.050 RICHARD SCHMALENSEE: Educate women in everything? 00:06:52.050 --> 00:06:55.230 Does Wellesley have a big engineering school? 00:06:55.230 --> 00:06:58.920 Liberal arts-- focuses on women, focuses on liberal arts, 00:06:58.920 --> 00:07:03.540 doesn't offer graduate degrees, stay small. 00:07:03.540 --> 00:07:05.510 That's pretty easy. 00:07:05.510 --> 00:07:06.500 What about MIT? 00:07:06.500 --> 00:07:08.780 It's more than just hands-on learning. 00:07:08.780 --> 00:07:10.760 MIT doesn't have a law school. 00:07:10.760 --> 00:07:13.010 Harvard has a law school. 00:07:13.010 --> 00:07:16.070 Harvard has had a law school for a long time. 00:07:16.070 --> 00:07:21.110 Presumably those are strategic differences. 00:07:21.110 --> 00:07:25.070 Yes, somebody actually sat down and said, 00:07:25.070 --> 00:07:26.480 should MIT have a law school? 00:07:26.480 --> 00:07:28.340 No, MIT shouldn't. 00:07:28.340 --> 00:07:32.000 That decision has been looked at several times in history. 00:07:32.000 --> 00:07:32.720 Why do you think? 00:07:35.462 --> 00:07:37.795 AUDIENCE: So they can focus on being the best in science 00:07:37.795 --> 00:07:38.772 and engineering. 00:07:38.772 --> 00:07:41.230 RICHARD SCHMALENSEE: It focuses on science and engineering, 00:07:41.230 --> 00:07:44.840 and things that complement and work with it. 00:07:44.840 --> 00:07:47.810 So does economics make sense? 00:07:47.810 --> 00:07:51.260 Yeah, it does, historically it does. 00:07:51.260 --> 00:07:53.260 One of the early presidents of MIT 00:07:53.260 --> 00:07:55.630 was the founder of the American Economic Association, 00:07:55.630 --> 00:07:58.990 so somebody thought it made sense. 00:07:58.990 --> 00:08:02.080 We've done business for a long time, 00:08:02.080 --> 00:08:05.080 almost since the start of the institute. 00:08:05.080 --> 00:08:08.090 How about linguistics? 00:08:08.090 --> 00:08:09.410 Why do we do linguistics? 00:08:14.012 --> 00:08:15.387 AUDIENCE: I've heard it's largely 00:08:15.387 --> 00:08:18.492 because of Noam Chomsky, because he developed the [INAUDIBLE].. 00:08:18.492 --> 00:08:20.950 RICHARD SCHMALENSEE: Yeah, I think that's the right answer. 00:08:20.950 --> 00:08:24.700 I mean, my sense is a whole bunch of decisions 00:08:24.700 --> 00:08:26.830 have been made that a whole bunch of areas 00:08:26.830 --> 00:08:28.750 will be basically service departments, 00:08:28.750 --> 00:08:32.049 so that we can actually give a rounded education. 00:08:32.049 --> 00:08:36.490 And into that-- history, we don't do advanced degrees 00:08:36.490 --> 00:08:37.900 in history. 00:08:37.900 --> 00:08:40.120 And sociology we don't have. 00:08:40.120 --> 00:08:42.070 Psychology is very focused. 00:08:42.070 --> 00:08:45.803 But into languages and linguistics stumbles 00:08:45.803 --> 00:08:48.220 Noam Chomsky, and you say, oh, my god, what an opportunity 00:08:48.220 --> 00:08:51.100 this is, and so you build on it. 00:08:51.100 --> 00:08:53.620 But it's not a big department, and it's pretty focused. 00:08:53.620 --> 00:08:55.533 And we don't have a lot of modern languages. 00:08:55.533 --> 00:08:56.950 We don't have a French department. 00:08:56.950 --> 00:08:58.690 We don't have a Spanish department. 00:08:58.690 --> 00:09:01.120 There's probably a French department at Wellesley, yes? 00:09:01.120 --> 00:09:01.840 Yeah. 00:09:01.840 --> 00:09:03.520 We don't have one. 00:09:03.520 --> 00:09:05.710 So MIT does have a strategy. 00:09:05.710 --> 00:09:09.880 It's not perfectly-- not easily written down, 00:09:09.880 --> 00:09:13.090 but the strategic descriptions have 00:09:13.090 --> 00:09:16.270 to do with science, engineering, and related fields, 00:09:16.270 --> 00:09:18.310 and complementary fields. 00:09:18.310 --> 00:09:20.470 Wellesley's is pretty clear. 00:09:20.470 --> 00:09:24.790 Harvard's is we do almost everything. 00:09:24.790 --> 00:09:26.793 We're a full-service supplier. 00:09:26.793 --> 00:09:28.210 It is interesting, Harvard doesn't 00:09:28.210 --> 00:09:29.252 have a veterinary school. 00:09:29.252 --> 00:09:32.890 I'm not quite sure why, but they have just about everything else 00:09:32.890 --> 00:09:35.260 you could think about. 00:09:35.260 --> 00:09:38.590 I don't think they have Library Science, but just about 00:09:38.590 --> 00:09:39.740 everything else. 00:09:39.740 --> 00:09:42.920 So those are strategies. 00:09:42.920 --> 00:09:45.370 MIT has faced the possibility of a law school. 00:09:45.370 --> 00:09:47.260 MIT could make money with a law school, 00:09:47.260 --> 00:09:49.780 has decided not to do it, has decided 00:09:49.780 --> 00:09:52.120 not to have a medical school. 00:09:52.120 --> 00:09:54.200 That's a harder call. 00:09:54.200 --> 00:09:56.870 That's a more interesting call, but has decided 00:09:56.870 --> 00:09:59.270 not to do a medical school. 00:09:59.270 --> 00:10:03.050 Strategy is, to an important extent, what you won't do. 00:10:03.050 --> 00:10:06.080 And you could certainly do a net present value calculation 00:10:06.080 --> 00:10:09.280 for the MIT Medical School and come out 00:10:09.280 --> 00:10:12.190 with a positive and also social impact. 00:10:12.190 --> 00:10:15.190 You could also talk about a law school 00:10:15.190 --> 00:10:18.760 with heavy focus on patent law and related intellectual 00:10:18.760 --> 00:10:23.350 property fields, which does, to a certain extent, 00:10:23.350 --> 00:10:26.890 complement, but also distracts. 00:10:26.890 --> 00:10:28.660 And that's a strategic choice. 00:10:28.660 --> 00:10:31.840 So universities, like all kinds of other organizations, 00:10:31.840 --> 00:10:35.550 need to make strategic choices. 00:10:35.550 --> 00:10:39.010 Another strategy might be we'll do almost anything that 00:10:39.010 --> 00:10:40.210 will turn a profit. 00:10:40.210 --> 00:10:42.900 And you see some places look like that. 00:10:42.900 --> 00:10:45.380 MIT very much doesn't. 00:10:45.380 --> 00:10:49.900 So if you're really thinking about a sustainable advantage 00:10:49.900 --> 00:10:52.120 of some sort, a coherent strategy, 00:10:52.120 --> 00:11:03.880 you have to consider the next bullet, or not. 00:11:03.880 --> 00:11:07.420 What the next bullet says is, when the slide works, 00:11:07.420 --> 00:11:10.300 you have to think about complementarities 00:11:10.300 --> 00:11:13.905 or fit among investment projects. 00:11:13.905 --> 00:11:15.280 Meantime, I'm going to figure out 00:11:15.280 --> 00:11:18.040 why this works or this doesn't work. 00:11:18.040 --> 00:11:22.000 The nice piece that we had-- 00:11:22.000 --> 00:11:23.630 tech support, please. 00:11:23.630 --> 00:11:26.960 I have a frozen machine at the moment. 00:11:26.960 --> 00:11:30.850 There are nice examples in Porter about IKEA 00:11:30.850 --> 00:11:34.150 and about Southwest Airlines, and they're 00:11:34.150 --> 00:11:39.510 great examples of taking on things that fit together. 00:11:39.510 --> 00:11:43.060 Southwest Airlines doesn't offer food. 00:11:43.060 --> 00:11:46.690 Southwest Airlines flies out of small airports. 00:11:46.690 --> 00:11:50.770 Southwest Airlines flies one kind of airplane. 00:11:50.770 --> 00:11:56.080 All those things fit together-- low cost, convenient. 00:11:56.080 --> 00:12:00.280 You could make a case that gee, if we had more-- 00:12:00.280 --> 00:12:04.570 oh, and you don't book through online services. 00:12:04.570 --> 00:12:05.748 You had a hammer? 00:12:05.748 --> 00:12:07.580 AUDIENCE: No, I have to [INAUDIBLE].. 00:12:07.580 --> 00:12:10.277 RICHARD SCHMALENSEE: OK, thank you. 00:12:10.277 --> 00:12:12.610 All right, we're going to try to do this without slides. 00:12:12.610 --> 00:12:13.527 It's going to be good. 00:12:18.447 --> 00:12:21.970 The examples there are things that fit together. 00:12:21.970 --> 00:12:25.030 You could imagine Southwest doing a calculation, 00:12:25.030 --> 00:12:28.750 and saying, well, if we used online booking services, 00:12:28.750 --> 00:12:30.490 we'd get more volume. 00:12:30.490 --> 00:12:32.470 And that'll cost us x percent. 00:12:32.470 --> 00:12:35.110 And you could imagine saying, well, it'll 00:12:35.110 --> 00:12:38.410 increase our costs a little bit, but it'll pay off. 00:12:38.410 --> 00:12:40.960 They have a relentless focus on costs. 00:12:40.960 --> 00:12:42.525 We're not going to do it. 00:12:42.525 --> 00:12:44.650 We're not going to have assigned seats-- that takes 00:12:44.650 --> 00:12:46.000 time and extra gate personnel. 00:12:46.000 --> 00:12:51.670 We're not going to do online reservations, because that'll 00:12:51.670 --> 00:12:52.630 increase our costs. 00:12:52.630 --> 00:12:54.580 We're going to be low cost, convenient. 00:12:54.580 --> 00:12:57.670 We're not going to have different kinds of planes, 00:12:57.670 --> 00:12:59.320 even though on some routes we might 00:12:59.320 --> 00:13:01.180 want to fly larger planes, because that'll 00:13:01.180 --> 00:13:03.190 increase our costs. 00:13:03.190 --> 00:13:09.830 So Southwest thinks about how its decisions fit together. 00:13:09.830 --> 00:13:13.780 Similarly, the example of IKEA, which you all probably 00:13:13.780 --> 00:13:17.080 know better than I do, but you go into a traditional furniture 00:13:17.080 --> 00:13:19.900 store, you can get all kinds of different things. 00:13:19.900 --> 00:13:22.810 You order them-- many fabrics, many styles. 00:13:22.810 --> 00:13:24.610 It takes six to eight weeks. 00:13:24.610 --> 00:13:28.900 Some slave in North Carolina makes it, and it's shipped up. 00:13:28.900 --> 00:13:32.470 IKEA doesn't offer that, doesn't offer the customization. 00:13:32.470 --> 00:13:36.100 It offers cost, convenience, and a certain look. 00:13:36.100 --> 00:13:37.840 That's what it focuses on. 00:13:37.840 --> 00:13:41.390 All of its decisions aim for that. 00:13:41.390 --> 00:13:43.660 So that's a coherent strategy. 00:13:43.660 --> 00:13:45.610 You don't just take anything with 00:13:45.610 --> 00:13:47.110 a positive net present value. 00:13:47.110 --> 00:13:51.470 You ask how does it fit with what we're trying to do? 00:13:51.470 --> 00:13:53.800 How does it fit with what we're trying to do? 00:13:53.800 --> 00:13:59.980 An MIT law school might have positive benefits. 00:13:59.980 --> 00:14:02.590 How does it fit with the main focus? 00:14:02.590 --> 00:14:05.860 How would the law school faculty interact with other faculty? 00:14:05.860 --> 00:14:07.450 Would it be the kinds of people who 00:14:07.450 --> 00:14:08.860 will fit well on the campus? 00:14:08.860 --> 00:14:12.076 How would law students relate? 00:14:12.076 --> 00:14:15.510 That's not to say that that's an obvious question. 00:14:15.510 --> 00:14:18.720 I always think a more interesting strategic choice 00:14:18.720 --> 00:14:21.870 is, should MIT invest more in public policy? 00:14:21.870 --> 00:14:24.450 We have STS and so forth. 00:14:24.450 --> 00:14:26.250 We don't have the Kennedy School. 00:14:26.250 --> 00:14:28.110 You could imagine a case being made 00:14:28.110 --> 00:14:30.510 for a serious public policy school focused 00:14:30.510 --> 00:14:32.520 on science and technology. 00:14:32.520 --> 00:14:34.410 That case hasn't been made. 00:14:34.410 --> 00:14:36.810 And that's a money loser, by the way, 00:14:36.810 --> 00:14:39.360 but it might have other strategic value. 00:14:39.360 --> 00:14:40.513 Any hope? 00:14:40.513 --> 00:14:42.830 AUDIENCE: They have to reboot the machine [INAUDIBLE].. 00:14:42.830 --> 00:14:45.830 RICHARD SCHMALENSEE: They have to reboot the machine. 00:14:45.830 --> 00:14:47.690 OK. 00:14:47.690 --> 00:14:52.290 We now go to blackboard for the next slide. 00:14:52.290 --> 00:14:56.510 The next slide has to do with-- 00:14:56.510 --> 00:14:58.890 and I can't do blackboard with a jacket on. 00:14:58.890 --> 00:15:03.370 So the next slide has to do with industry attractiveness. 00:15:06.080 --> 00:15:14.810 So as I said, this is about thinking about what activities 00:15:14.810 --> 00:15:15.560 you are doing. 00:15:15.560 --> 00:15:17.420 What are you offering customers? 00:15:17.420 --> 00:15:19.970 If you're offering customers the same things 00:15:19.970 --> 00:15:23.510 as a lot of competitors, then you can be really good, 00:15:23.510 --> 00:15:25.040 but unless there's some way you're 00:15:25.040 --> 00:15:28.890 better that can't be imitated, you've got a problem. 00:15:28.890 --> 00:15:33.800 So if you look at an industry and you 00:15:33.800 --> 00:15:40.100 ask what things affect profits, one thing 00:15:40.100 --> 00:15:41.780 is the intensity of competition. 00:15:45.720 --> 00:15:49.020 Another thing is pressure from suppliers-- 00:15:49.020 --> 00:15:50.490 I'll give you examples in a minute. 00:15:54.960 --> 00:16:10.640 Another thing is pressure from buyers, substitutes, and entry. 00:16:15.650 --> 00:16:24.860 This is an ugly version of the famous Mike Porter Five Forces. 00:16:30.680 --> 00:16:34.100 If you understand this fully, you're a third of the way 00:16:34.100 --> 00:16:36.648 through the MBA course in strategy. 00:16:36.648 --> 00:16:37.940 So let me try to do it quickly. 00:16:37.940 --> 00:16:38.810 It's not very hard-- 00:16:42.270 --> 00:16:46.160 maybe only a quarter of the way through. 00:16:46.160 --> 00:16:50.480 Regardless of what the supply conditions are, 00:16:50.480 --> 00:16:52.670 and whether they're entrants or not, 00:16:52.670 --> 00:16:54.980 if the industry is perfectly competitive, 00:16:54.980 --> 00:16:55.970 nobody makes any money. 00:16:55.970 --> 00:16:58.190 That's sort of the definition. 00:16:58.190 --> 00:17:02.330 And obviously, competition runs along some sort of spectrum 00:17:02.330 --> 00:17:05.900 between a lot of small firms beating each other's brains out 00:17:05.900 --> 00:17:09.740 and one monopoly taking everything there is to be had. 00:17:09.740 --> 00:17:12.740 So this is one force that can affect competition, 00:17:12.740 --> 00:17:15.890 can affect profits, is the intensity of competition 00:17:15.890 --> 00:17:18.290 within the industry. 00:17:18.290 --> 00:17:24.020 Another force is the existence of close substitutes. 00:17:24.020 --> 00:17:27.109 We all make wax paper, and we're great wax paper manufacturers, 00:17:27.109 --> 00:17:30.320 but plastic wrap is eating our lunch. 00:17:30.320 --> 00:17:35.030 And so there may be only two or three of us making wax paper, 00:17:35.030 --> 00:17:40.070 but with the availability of cheap plastic wrap, 00:17:40.070 --> 00:17:42.830 it means we have probably declining demand. 00:17:42.830 --> 00:17:46.490 It means we probably have a highly elastic demand curve. 00:17:46.490 --> 00:17:49.530 And even with a monopoly, we can't make any money, 00:17:49.530 --> 00:17:52.400 so close, good substitutes erode profits. 00:17:57.110 --> 00:17:59.120 Please have at it. 00:17:59.120 --> 00:18:01.010 I'm a wax paper manufacturer. 00:18:01.010 --> 00:18:04.610 There's only one of me, but anybody and his kid sister 00:18:04.610 --> 00:18:06.550 can make wax paper. 00:18:06.550 --> 00:18:09.002 That's not quite right, and it could be his kid brother, 00:18:09.002 --> 00:18:10.210 too, don't mean to be sexist. 00:18:10.210 --> 00:18:13.720 But if it's really easy for competitors 00:18:13.720 --> 00:18:16.240 to come in if anybody's making any money, 00:18:16.240 --> 00:18:20.170 nobody can sustain high profits. 00:18:20.170 --> 00:18:22.630 So you look at entry when you do an industry analysis, 00:18:22.630 --> 00:18:25.390 is it easy for outsiders to come in? 00:18:25.390 --> 00:18:27.316 What are the obstacles? 00:18:27.316 --> 00:18:29.300 Do you need specialized knowledge? 00:18:29.300 --> 00:18:31.450 Do you need huge capital? 00:18:31.450 --> 00:18:33.320 What are the problems? 00:18:33.320 --> 00:18:36.550 If there aren't any obvious barriers-- 00:18:36.550 --> 00:18:39.682 we're making furniture in North Carolina. 00:18:39.682 --> 00:18:41.890 What do you need to make furniture in North Carolina? 00:18:41.890 --> 00:18:43.270 You need to hire good carpenters, 00:18:43.270 --> 00:18:46.945 and get a supply of wood, and have some design skill. 00:18:46.945 --> 00:18:48.580 Are those high barriers to entry? 00:18:48.580 --> 00:18:50.080 Probably not. 00:18:50.080 --> 00:18:52.420 So would you expect, even if there are only 00:18:52.420 --> 00:18:54.310 a small number of furniture manufacturers, 00:18:54.310 --> 00:18:56.185 would you expect them to make a lot of money? 00:18:56.185 --> 00:18:58.840 Probably not. 00:18:58.840 --> 00:19:05.560 OK, suppliers-- my favorite example 00:19:05.560 --> 00:19:09.780 here really is airlines, because one 00:19:09.780 --> 00:19:12.360 of the things that characterized airlines, particularly 00:19:12.360 --> 00:19:17.190 under regulation, is very strong unions. 00:19:17.190 --> 00:19:20.910 So while the airlines didn't make any money, 00:19:20.910 --> 00:19:24.590 airline employees did. 00:19:24.590 --> 00:19:27.752 Pilots earn very high salary for relatively little work. 00:19:27.752 --> 00:19:29.210 Flight attendants-- this is, again, 00:19:29.210 --> 00:19:32.180 in the days of regulation-- flight attendants 00:19:32.180 --> 00:19:34.100 earned very high salaries. 00:19:34.100 --> 00:19:38.960 The regulators pushed prices up, and most of the rent, 00:19:38.960 --> 00:19:42.200 most of the profit, went down here to the unionized suppliers 00:19:42.200 --> 00:19:45.470 because there was pretty heavy competition up here. 00:19:45.470 --> 00:19:50.030 So we had competition here, the ability here to earn rent. 00:19:50.030 --> 00:19:52.010 You see this in a lot of industries 00:19:52.010 --> 00:19:56.240 where there's relatively little competition in the industry-- 00:19:56.240 --> 00:20:01.250 competition within the industry, substitutes, buyers, entrants, 00:20:01.250 --> 00:20:03.560 suppliers. 00:20:03.560 --> 00:20:08.000 Is injection molding a good business to be in in 1995? 00:20:08.000 --> 00:20:10.436 Julian, why not? 00:20:10.436 --> 00:20:13.610 AUDIENCE: Because China does it cheaper. 00:20:13.610 --> 00:20:17.840 RICHARD SCHMALENSEE: Well, not in 1995, they didn't. 00:20:17.840 --> 00:20:22.130 Let's stay within the bounds of the case if we can. 00:20:22.130 --> 00:20:23.570 Anybody else? 00:20:23.570 --> 00:20:25.650 Charlotte. 00:20:25.650 --> 00:20:27.570 AUDIENCE: No, because at that point, 00:20:27.570 --> 00:20:30.440 competitors are thinking of ways to do things 00:20:30.440 --> 00:20:33.034 cheaper to [INAUDIBLE] money and also 00:20:33.034 --> 00:20:36.620 because the buyers were these people using 00:20:36.620 --> 00:20:38.120 the machines that they were making, 00:20:38.120 --> 00:20:43.114 and the materials they needed were in high demand, 00:20:43.114 --> 00:20:44.757 so prices are going up. 00:20:44.757 --> 00:20:46.340 RICHARD SCHMALENSEE: That's the resin. 00:20:46.340 --> 00:20:47.270 We'll come to that. 00:20:47.270 --> 00:20:51.350 But this thing, you're saying there's just a lot 00:20:51.350 --> 00:20:54.320 going on here within the industry-- very 00:20:54.320 --> 00:20:56.450 intense computation. 00:20:56.450 --> 00:20:59.480 What's interesting about this is that's right. 00:20:59.480 --> 00:21:01.700 It doesn't look like most of that industry 00:21:01.700 --> 00:21:05.780 is very attractive, even though it's growing like crazy. 00:21:05.780 --> 00:21:07.340 The industry is growing like crazy-- 00:21:07.340 --> 00:21:09.080 it's a great example of everybody 00:21:09.080 --> 00:21:12.380 having to run fast to stay in the same place, 00:21:12.380 --> 00:21:15.140 because there's a lot of innovation, as Charlotte says, 00:21:15.140 --> 00:21:18.800 and if you're not doing it, you lose. 00:21:18.800 --> 00:21:22.725 So industries that look like that are not uncommon. 00:21:22.725 --> 00:21:24.350 You think about the early days-- again, 00:21:24.350 --> 00:21:27.200 Warren Buffett-- the early days of automobiles. 00:21:27.200 --> 00:21:30.260 There were hundreds of people making automobiles. 00:21:30.260 --> 00:21:32.150 And they were all making great progress, 00:21:32.150 --> 00:21:34.242 and innovating like crazy, and automobile sales 00:21:34.242 --> 00:21:36.200 were taking off like a rocket, and most of them 00:21:36.200 --> 00:21:40.790 died because they were offering more or less the same kind 00:21:40.790 --> 00:21:44.570 of product, doing more or less the same things as everybody 00:21:44.570 --> 00:21:47.880 else, and had to run to keep in place. 00:21:47.880 --> 00:21:56.870 So I think in terms of we hear a little bit about buyers-- 00:21:56.870 --> 00:21:57.800 only a little bit. 00:21:57.800 --> 00:22:02.390 One of the big bottle makers is mentioned as a powerful buyer. 00:22:02.390 --> 00:22:04.890 We don't know much about that. 00:22:04.890 --> 00:22:08.740 Substitutes, we seem to be pretty good. 00:22:08.740 --> 00:22:11.800 This looks like an industry people can enter. 00:22:11.800 --> 00:22:13.977 This does not look like a high barrier industry. 00:22:13.977 --> 00:22:15.810 We're not told much about that, but we don't 00:22:15.810 --> 00:22:18.000 see much of a problem there. 00:22:18.000 --> 00:22:20.190 There seem to be lots of mold makers and lots 00:22:20.190 --> 00:22:21.730 of suppliers of components. 00:22:21.730 --> 00:22:23.460 So we don't seem to have a problem here. 00:22:23.460 --> 00:22:25.000 The real problem in this industry 00:22:25.000 --> 00:22:30.450 is here, where there's just very intense competition, 00:22:30.450 --> 00:22:33.750 even though there's high growth, even though there's innovation. 00:22:33.750 --> 00:22:35.520 Everybody is innovating. 00:22:35.520 --> 00:22:37.350 Everybody is moving. 00:22:37.350 --> 00:22:42.350 And everybody's running very fast to stay in the same place. 00:22:42.350 --> 00:22:44.140 So how do you beat this? 00:22:44.140 --> 00:22:48.610 Well, let me talk generically, and then we'll go to Husky. 00:22:48.610 --> 00:22:55.240 So generically, stepping way back, 00:22:55.240 --> 00:22:58.260 you've got to both create value and capture it. 00:22:58.260 --> 00:23:04.530 So if you think about suppliers, what 00:23:04.530 --> 00:23:12.900 would you get for airplanes and airline personnel? 00:23:12.900 --> 00:23:14.700 What would you have to pay to get a pilot 00:23:14.700 --> 00:23:18.060 to fly as opposed to what you do pay to get a pilot to fly-- 00:23:18.060 --> 00:23:23.610 again, in the great old days of limited competition. 00:23:23.610 --> 00:23:26.670 There may well be a gap between the suppliers' opportunity 00:23:26.670 --> 00:23:29.280 costs-- what else could they do with their capital and labor-- 00:23:29.280 --> 00:23:30.810 and what they sell for. 00:23:30.810 --> 00:23:33.840 That's captured by the supplier. 00:23:33.840 --> 00:23:42.820 There better be some gap between what buyers are willing to pay 00:23:42.820 --> 00:23:45.620 and what they actually pay. 00:23:45.620 --> 00:23:47.300 And the difference is what you get 00:23:47.300 --> 00:23:50.780 to take home, the difference between what it actually costs 00:23:50.780 --> 00:23:52.400 you and what you can sell. 00:23:52.400 --> 00:23:54.890 And this is, like, yeah. 00:23:54.890 --> 00:23:58.250 This is pretty straightforward and pretty obvious. 00:23:58.250 --> 00:24:01.320 But you really do need to think through-- 00:24:01.320 --> 00:24:03.020 and I love the animation-- you do 00:24:03.020 --> 00:24:06.523 need to think through who captures it. 00:24:06.523 --> 00:24:07.940 If you go to the airlines, there's 00:24:07.940 --> 00:24:14.150 anomalous value created by the airline industry, historically. 00:24:14.150 --> 00:24:15.890 Imagine it going away. 00:24:15.890 --> 00:24:20.750 It's not captured, by and large, by the airline companies. 00:24:20.750 --> 00:24:21.770 Where does it go? 00:24:21.770 --> 00:24:25.250 Well, with the decline of airline unions, less of it 00:24:25.250 --> 00:24:32.350 gets captured by suppliers, and more of it's captured by us. 00:24:32.350 --> 00:24:35.470 If you think about the alternative way of-- 00:24:35.470 --> 00:24:36.850 I was in Florida last week. 00:24:36.850 --> 00:24:39.580 And driving to Florida, which I have done, is not much fun. 00:24:39.580 --> 00:24:42.490 So I would have been willing to spend a lot more than it 00:24:42.490 --> 00:24:45.040 cost me to fly. 00:24:45.040 --> 00:24:48.220 I got a huge surplus. 00:24:48.220 --> 00:24:51.113 I don't have the impression that the folks supplying the airline 00:24:51.113 --> 00:24:52.280 were getting a lot of money. 00:24:52.280 --> 00:24:54.370 And I know the airline wasn't getting much 00:24:54.370 --> 00:24:56.210 in terms of captured surplus. 00:24:56.210 --> 00:25:00.310 So the basic strategic question is, in any kind of industry-- 00:25:00.310 --> 00:25:02.650 attractive or unattractive-- 00:25:02.650 --> 00:25:05.140 can you do this? 00:25:05.140 --> 00:25:10.300 So where Porter is pointing, and where this case points us, 00:25:10.300 --> 00:25:13.450 is to ways to not do the same thing 00:25:13.450 --> 00:25:16.310 your competitors are doing. 00:25:16.310 --> 00:25:18.950 What can we do differently? 00:25:18.950 --> 00:25:24.040 Well, the first basic-- this is sort of the Southwest strategy. 00:25:24.040 --> 00:25:30.730 This says, we are going to drive down costs and in a way that's 00:25:30.730 --> 00:25:32.380 hard to imitate. 00:25:32.380 --> 00:25:35.260 We'll talk about what makes it hard to imitate. 00:25:35.260 --> 00:25:38.230 We're going to drive down costs, and maybe we 00:25:38.230 --> 00:25:40.960 supply a somewhat different product. 00:25:40.960 --> 00:25:43.318 Southwest's product is not very useful for somebody 00:25:43.318 --> 00:25:45.610 who-- not very interesting to somebody who always flies 00:25:45.610 --> 00:25:47.620 first class and cares about it. 00:25:47.620 --> 00:25:49.540 They don't do first class. 00:25:49.540 --> 00:25:51.160 They've written that off. 00:25:51.160 --> 00:25:53.020 They don't do frequent flyer, I don't think. 00:25:53.020 --> 00:25:54.490 Maybe they do. 00:25:54.490 --> 00:25:57.250 But for a whole set of business travelers, 00:25:57.250 --> 00:25:58.962 they're not that attractive. 00:25:58.962 --> 00:26:00.670 They're cheap, yeah, but if somebody else 00:26:00.670 --> 00:26:02.825 is paying my airfare, that's not too attractive. 00:26:02.825 --> 00:26:04.950 They're not convenient because I can't book online. 00:26:04.950 --> 00:26:05.810 I think about my own travel. 00:26:05.810 --> 00:26:07.352 Usually somebody else is paying and I 00:26:07.352 --> 00:26:09.340 book online for simplicity. 00:26:09.340 --> 00:26:13.610 I never fly Southwest because the fare difference doesn't 00:26:13.610 --> 00:26:15.620 bother the people who are paying my airfare, 00:26:15.620 --> 00:26:19.370 and online booking is so enormously convenient 00:26:19.370 --> 00:26:21.030 that I just do it. 00:26:21.030 --> 00:26:27.740 So I'm not in the set of consumers they're aiming at. 00:26:27.740 --> 00:26:28.760 So what? 00:26:28.760 --> 00:26:30.230 There are enough of them. 00:26:30.230 --> 00:26:32.600 There are enough people and enough travel occasions-- 00:26:32.600 --> 00:26:35.870 and I can imagine occasions when I would check Southwest just 00:26:35.870 --> 00:26:39.050 to see if they're cheaper. 00:26:39.050 --> 00:26:40.340 That's a strategy. 00:26:40.340 --> 00:26:47.160 That issue there is what makes it hard to imitate. 00:26:47.160 --> 00:26:49.620 What makes it hard to imitate? 00:26:49.620 --> 00:26:53.060 As Charlotte pointed out in the injection molding business, 00:26:53.060 --> 00:26:58.170 everybody's innovating, and in the airline 00:26:58.170 --> 00:27:01.650 business everybody does electronic reservations, 00:27:01.650 --> 00:27:04.080 and everybody does this, and everybody does that-- 00:27:04.080 --> 00:27:07.600 lots of innovation, everybody driving down 00:27:07.600 --> 00:27:10.180 costs-- more fuel efficient engines, 00:27:10.180 --> 00:27:13.270 no barriers to imitation. 00:27:13.270 --> 00:27:15.370 United can copy what American does. 00:27:15.370 --> 00:27:19.220 American can copy what United does. 00:27:19.220 --> 00:27:21.740 There are seminars on industry best practice. 00:27:21.740 --> 00:27:23.480 Everybody does industry best practice. 00:27:23.480 --> 00:27:26.360 You don't make any money doing industry best practice. 00:27:26.360 --> 00:27:27.810 You may avoid losing money. 00:27:27.810 --> 00:27:29.750 So that's strategy one. 00:27:29.750 --> 00:27:32.330 Can I somehow get low costs? 00:27:32.330 --> 00:27:35.690 And I highlight this "some consumers," 00:27:35.690 --> 00:27:40.430 because Southwest and IKEA are nice examples of picking 00:27:40.430 --> 00:27:44.490 a piece of the market which a low-cost strategy makes sense. 00:27:44.490 --> 00:27:47.610 Not everybody goes to IKEA. 00:27:47.610 --> 00:27:51.060 I've never been in an IKEA, as it happens. 00:27:51.060 --> 00:27:54.600 But lots of people do, and that's 00:27:54.600 --> 00:27:57.330 enough to make them a lot of money. 00:27:57.330 --> 00:28:00.120 The other strategy, not too surprisingly, 00:28:00.120 --> 00:28:03.900 is to go the other direction, is to find a way 00:28:03.900 --> 00:28:06.300 to increase perceived quality, willingness 00:28:06.300 --> 00:28:12.990 to pay for some buyers to justify higher prices. 00:28:12.990 --> 00:28:16.650 What can we do to justify higher prices? 00:28:16.650 --> 00:28:21.430 And again, there are examples-- 00:28:21.430 --> 00:28:24.910 Mercedes Benz is a high quality. 00:28:24.910 --> 00:28:26.950 They don't do the same thing that everybody else 00:28:26.950 --> 00:28:29.830 does, not the same kind of car. 00:28:29.830 --> 00:28:30.670 It costs more. 00:28:30.670 --> 00:28:31.900 It absolutely costs more. 00:28:31.900 --> 00:28:34.600 In this example, the cost is the same, 00:28:34.600 --> 00:28:36.227 but you could still make a lot of money 00:28:36.227 --> 00:28:37.810 if those costs were a little higher as 00:28:37.810 --> 00:28:44.180 long as the differentiation is effective. 00:28:44.180 --> 00:28:49.030 So this kind of strategy, you pick something 00:28:49.030 --> 00:28:49.945 that somebody values. 00:28:53.050 --> 00:28:55.870 Actually, the online bookings-- well, not quite. 00:28:55.870 --> 00:28:58.390 That's an interesting story. 00:28:58.390 --> 00:28:59.740 You meet the needs. 00:28:59.740 --> 00:29:01.360 You add costs. 00:29:01.360 --> 00:29:03.160 You get premium prices-- 00:29:03.160 --> 00:29:09.760 terrific story, but it has to be cost effective. 00:29:09.760 --> 00:29:12.350 That is to say, you can raise the price, 00:29:12.350 --> 00:29:16.060 but if your costs go up by more than the price, you lose. 00:29:16.060 --> 00:29:20.230 And you come down to the same issue-- 00:29:20.230 --> 00:29:22.840 is imitation difficult? 00:29:22.840 --> 00:29:24.550 Is imitation difficult? 00:29:24.550 --> 00:29:27.730 Again, we're going to see this in Husky-- 00:29:27.730 --> 00:29:29.530 is imitation difficult? 00:29:32.080 --> 00:29:37.600 There's sort of-- nice diagram-- 00:29:37.600 --> 00:29:42.850 there's sort of three kinds of stories about ways 00:29:42.850 --> 00:29:47.740 that imitation can be difficult. The first 00:29:47.740 --> 00:29:52.360 is sort of the IKEA/Southwest up on top, the integration, 00:29:52.360 --> 00:29:55.360 that if you have to build the company 00:29:55.360 --> 00:29:59.200 to deliver on a strategy effectively, 00:29:59.200 --> 00:30:02.860 that's, again in Porter, the Southwest Airlines versus-- 00:30:02.860 --> 00:30:05.470 what was it, Continental Light. 00:30:05.470 --> 00:30:07.472 So Continental decides they can compete 00:30:07.472 --> 00:30:08.680 with these low-cost carriers. 00:30:08.680 --> 00:30:10.510 They'll offer a low-cost carrier. 00:30:10.510 --> 00:30:15.100 They won't serve meals and they won't do assigned seats, 00:30:15.100 --> 00:30:17.560 but they do baggage interchange with other airlines 00:30:17.560 --> 00:30:19.660 because they're Continental. 00:30:19.660 --> 00:30:23.860 They do online booking because they're Continental. 00:30:23.860 --> 00:30:25.600 They do a variety of other things 00:30:25.600 --> 00:30:26.890 because they're Continental. 00:30:26.890 --> 00:30:31.970 And they can't get the cost down that low. 00:30:31.970 --> 00:30:33.800 To get the cost down that low, you've 00:30:33.800 --> 00:30:35.330 got to integrate the whole thing. 00:30:35.330 --> 00:30:41.030 You've got to build an IKEA to deliver IKEA. 00:30:41.030 --> 00:30:45.590 You can't have an IKEA tacked on to something else, which 00:30:45.590 --> 00:30:48.770 means it's hard for an existing firm to copy-- 00:30:48.770 --> 00:30:51.875 the notion that you have to integrate the whole system. 00:30:56.960 --> 00:31:00.800 I guess another sort of example like that 00:31:00.800 --> 00:31:04.820 would be Jiffy Lube or one of the quick lube places 00:31:04.820 --> 00:31:06.200 that used to-- you don't see them 00:31:06.200 --> 00:31:08.780 as much as you used to-- that offers cheap oil change. 00:31:08.780 --> 00:31:11.210 That's all they do or all they did. 00:31:11.210 --> 00:31:12.715 And could you imitate that? 00:31:12.715 --> 00:31:14.090 Yeah, you could, but you'd really 00:31:14.090 --> 00:31:17.060 have to have the company focused on doing just that. 00:31:17.060 --> 00:31:21.830 You can't do cheap oil change as part of a full service repair 00:31:21.830 --> 00:31:23.870 shop that does other things because you've 00:31:23.870 --> 00:31:27.830 got all that overhead and all of the systems 00:31:27.830 --> 00:31:28.820 to handle everything. 00:31:28.820 --> 00:31:31.490 If you just do oil change, it's a simple business. 00:31:31.490 --> 00:31:33.080 You could do it very cheaply. 00:31:33.080 --> 00:31:35.300 If you do more, you've got to hire different people, 00:31:35.300 --> 00:31:36.842 you've got to have different systems, 00:31:36.842 --> 00:31:38.510 you've got to have different inventory. 00:31:38.510 --> 00:31:40.940 So one reason it could be hard is 00:31:40.940 --> 00:31:43.220 that everything is integrated. 00:31:43.220 --> 00:31:44.810 Everything is integrated. 00:31:44.810 --> 00:31:47.180 It would be hard-- 00:31:47.180 --> 00:31:52.100 well, interestingly enough, if you think about General Motors, 00:31:52.100 --> 00:31:56.570 historically, Cadillac was focused on luxury cars 00:31:56.570 --> 00:32:00.650 and was sort of kept separate from the rest of GM. 00:32:00.650 --> 00:32:05.120 In the glory years, Cadillac delivered luxury cars. 00:32:05.120 --> 00:32:09.260 You couldn't have the Cadillac operation closely integrated 00:32:09.260 --> 00:32:12.440 with the Chevrolet operation. 00:32:12.440 --> 00:32:15.770 You have different philosophies, you have different purchasing, 00:32:15.770 --> 00:32:18.050 you have different design approaches. 00:32:18.050 --> 00:32:22.980 Cadillac, everything was focused on a certain kind of car-- 00:32:22.980 --> 00:32:26.070 integrated, built to deliver. 00:32:26.070 --> 00:32:28.050 You have to build a system-- 00:32:28.050 --> 00:32:30.750 as many people did, it turns out-- 00:32:30.750 --> 00:32:33.450 to compete. 00:32:33.450 --> 00:32:36.780 The second-- there on the right-- 00:32:36.780 --> 00:32:38.910 capture model is cost. 00:32:38.910 --> 00:32:40.560 You have a cost advantage. 00:32:40.560 --> 00:32:42.630 How can you have a cost advantage? 00:32:42.630 --> 00:32:45.480 Well, there might be economies of scale. 00:32:45.480 --> 00:32:47.070 You might have learning advantages. 00:32:47.070 --> 00:32:48.990 You might have other kinds of advantages. 00:32:48.990 --> 00:32:52.350 There are lots of ways you could have an advantage in cost. 00:32:52.350 --> 00:32:54.370 Yeah, Andrew. 00:32:54.370 --> 00:32:56.620 AUDIENCE: I just had a question regarding integration. 00:32:56.620 --> 00:32:58.450 These might be really bad examples. 00:32:58.450 --> 00:33:00.620 I'm just curious where they fit in. 00:33:00.620 --> 00:33:04.140 Like, a company like Walmart or like Toyota that 00:33:04.140 --> 00:33:06.670 are quite large scale, but then again, I've 00:33:06.670 --> 00:33:10.002 heard many things about the way they, for example, figured out 00:33:10.002 --> 00:33:13.660 how to have a really integrated system 00:33:13.660 --> 00:33:16.044 from the supplier to the end product and all that thing. 00:33:16.044 --> 00:33:21.790 I'm just curious, are they simply exceptions? 00:33:21.790 --> 00:33:25.190 Or are they doing some other things also that I've not seen? 00:33:25.190 --> 00:33:29.590 RICHARD SCHMALENSEE: Well, Toyota is a great case. 00:33:29.590 --> 00:33:32.050 And others may know that system better than I do. 00:33:32.050 --> 00:33:36.250 They combine a number of things, but it 00:33:36.250 --> 00:33:40.600 is an example of a system built to do a couple of things well. 00:33:40.600 --> 00:33:47.500 First, they built a product development system. 00:33:47.500 --> 00:33:50.962 It was much quicker than American manufacturers, 00:33:50.962 --> 00:33:53.170 and indeed, much quicker than European manufacturers. 00:33:53.170 --> 00:33:57.380 So they could go from concept to model on the street quicker. 00:33:57.380 --> 00:34:03.190 So that's the innovation speed down there in the left. 00:34:03.190 --> 00:34:04.600 Could you imitate it? 00:34:04.600 --> 00:34:06.770 A lot of people tried. 00:34:06.770 --> 00:34:09.429 There were no obvious barriers to imitating that. 00:34:09.429 --> 00:34:14.050 They also had some clever ways they did manufacturing-- 00:34:14.050 --> 00:34:17.440 just in time, and the whole Kanban and quality circles. 00:34:17.440 --> 00:34:21.000 There was a whole manufacturing system. 00:34:21.000 --> 00:34:21.900 Could you copy it? 00:34:21.900 --> 00:34:25.090 Well, a lot of people tried. 00:34:25.090 --> 00:34:27.159 And that's what's interesting. 00:34:27.159 --> 00:34:29.650 There was the Toyota-General Motors joint venture 00:34:29.650 --> 00:34:33.250 that produced-- what was it that they produced in California? 00:34:33.250 --> 00:34:34.760 NUMMI, yes. 00:34:34.760 --> 00:34:37.929 And General Motors was going to learn the Toyota system 00:34:37.929 --> 00:34:40.270 and copy it. 00:34:40.270 --> 00:34:43.270 Well, the cultures were different. 00:34:43.270 --> 00:34:46.886 And the GM workforce-- 00:34:46.886 --> 00:34:48.969 you've been doing something some way for 30 years, 00:34:48.969 --> 00:34:50.761 and somebody says, now we're going to do it 00:34:50.761 --> 00:34:54.190 this other way, that's hard. 00:34:54.190 --> 00:34:57.940 And you have to change the inventory control system 00:34:57.940 --> 00:35:00.222 and your purchasing system. 00:35:00.222 --> 00:35:01.930 Then you go to your designers, and you've 00:35:01.930 --> 00:35:05.800 got to change the speed at which you produce new products 00:35:05.800 --> 00:35:08.170 by changing that system. 00:35:08.170 --> 00:35:10.390 I mean, I'd say Toyota was successfully 00:35:10.390 --> 00:35:14.180 copied over a long time. 00:35:14.180 --> 00:35:16.510 I wouldn't say GM has successfully copied them. 00:35:16.510 --> 00:35:20.180 It wasn't that Toyota was bigger than anybody else. 00:35:20.180 --> 00:35:21.880 They were doing a better job when 00:35:21.880 --> 00:35:23.950 they were smaller, certainly smaller 00:35:23.950 --> 00:35:25.660 than the American companies. 00:35:25.660 --> 00:35:34.080 So they got cost by developing a manufacturing and design 00:35:34.080 --> 00:35:39.030 system that was simply better, and the advantage held 00:35:39.030 --> 00:35:42.060 because even though it looked like you could copy it, 00:35:42.060 --> 00:35:45.090 and there were articles and books written on how you do 00:35:45.090 --> 00:35:47.580 the Toyota, the Japanese system, it turned out 00:35:47.580 --> 00:35:52.605 to be harder to put it in place because you had to do it all. 00:35:52.605 --> 00:35:56.280 And again, over time, there are lots 00:35:56.280 --> 00:35:58.710 of studies where you see companies now 00:35:58.710 --> 00:36:00.870 that have that approach. 00:36:00.870 --> 00:36:02.490 But it was sustainable. 00:36:02.490 --> 00:36:05.130 And Toyota's not in great shape. 00:36:05.130 --> 00:36:10.230 It was sustainable in part because of the fact 00:36:10.230 --> 00:36:12.030 that it was a system. 00:36:12.030 --> 00:36:13.950 You had to do the whole thing. 00:36:13.950 --> 00:36:15.570 You couldn't just change inventory. 00:36:15.570 --> 00:36:17.280 You couldn't just change design. 00:36:17.280 --> 00:36:20.490 You had to take the whole thing, and that 00:36:20.490 --> 00:36:22.770 meant bringing people along. 00:36:22.770 --> 00:36:24.340 Could you do a startup that way? 00:36:24.340 --> 00:36:27.510 Yeah, much easier to do a startup, much easier 00:36:27.510 --> 00:36:30.180 to take people who've never built or designed automobiles, 00:36:30.180 --> 00:36:32.375 and say, here's how we're going to do it, 00:36:32.375 --> 00:36:33.750 but then you've got a whole bunch 00:36:33.750 --> 00:36:36.280 of people who've never built or designed automobiles. 00:36:36.280 --> 00:36:40.680 So it's a nice example. 00:36:40.680 --> 00:36:41.610 Thank you. 00:36:41.610 --> 00:36:43.710 Anything else? 00:36:43.710 --> 00:36:45.460 Any other comments? 00:36:45.460 --> 00:36:50.770 OK, let's do Husky. 00:36:50.770 --> 00:36:51.770 What's Husky's strategy? 00:36:54.380 --> 00:36:55.850 What is it that-- we're '95-- 00:36:55.850 --> 00:36:57.600 what is it historically Husky wouldn't do? 00:36:57.600 --> 00:36:58.950 Mary. 00:36:58.950 --> 00:37:01.375 AUDIENCE: So they stuck to some of the core values, 00:37:01.375 --> 00:37:04.770 like professionalism and dedicated hard work. 00:37:04.770 --> 00:37:10.228 They also devoted a lot of stuff to the health and-- 00:37:10.228 --> 00:37:12.270 RICHARD SCHMALENSEE: So that's a good description 00:37:12.270 --> 00:37:18.060 of the culture, of how they went about doing what they did. 00:37:18.060 --> 00:37:19.320 What did they do? 00:37:19.320 --> 00:37:20.940 What were their activities? 00:37:20.940 --> 00:37:22.200 Did they focus? 00:37:22.200 --> 00:37:25.260 Were they trying to do all kinds of injection molding, 00:37:25.260 --> 00:37:28.710 some kinds of injection molding, low end, high end, 00:37:28.710 --> 00:37:30.606 middle of the market? 00:37:30.606 --> 00:37:32.583 AUDIENCE: They focused on the PET system. 00:37:32.583 --> 00:37:34.750 RICHARD SCHMALENSEE: PET and the thin-wall business, 00:37:34.750 --> 00:37:37.630 so they focused on two segments. 00:37:37.630 --> 00:37:39.220 They didn't do everything. 00:37:39.220 --> 00:37:42.595 And as you say, they had this very interesting culture. 00:37:45.400 --> 00:37:46.450 So we got that one. 00:37:46.450 --> 00:37:49.180 Don't freeze again. 00:37:49.180 --> 00:37:53.530 What distinguished those segments from other segments? 00:37:53.530 --> 00:37:57.730 How were the PET and the thin-wall segments 00:37:57.730 --> 00:38:02.840 different from other parts of the business, other segments? 00:38:02.840 --> 00:38:04.040 Any obvious way? 00:38:04.040 --> 00:38:04.603 Yeah. 00:38:04.603 --> 00:38:06.520 AUDIENCE: I think they were trying to-- sorry, 00:38:06.520 --> 00:38:07.395 I forgot my name tag. 00:38:07.395 --> 00:38:09.982 RICHARD SCHMALENSEE: Yeah, but you do remember who you are. 00:38:09.982 --> 00:38:10.690 We're good there. 00:38:10.690 --> 00:38:11.140 OK. 00:38:11.140 --> 00:38:11.410 Yes. 00:38:11.410 --> 00:38:13.535 AUDIENCE: I think they were trying to find segments 00:38:13.535 --> 00:38:17.062 where a technological advantage is sustainable, 00:38:17.062 --> 00:38:18.520 but it actually makes a difference. 00:38:18.520 --> 00:38:21.010 Like the thin-wall business, it's 00:38:21.010 --> 00:38:24.602 like there's probably more technological know-how 00:38:24.602 --> 00:38:26.810 to make it, and allows you to make the walls thinner, 00:38:26.810 --> 00:38:30.010 and you can machine it faster and stuff 00:38:30.010 --> 00:38:32.680 like that, where it hadn't been really monetized yet, 00:38:32.680 --> 00:38:34.660 [INAUDIBLE]. 00:38:34.660 --> 00:38:37.600 RICHARD SCHMALENSEE: What about the PET bottle business? 00:38:37.600 --> 00:38:40.600 How is that different? 00:38:40.600 --> 00:38:42.760 AUDIENCE: It seemed like-- 00:38:42.760 --> 00:38:43.730 I wasn't really sure. 00:38:43.730 --> 00:38:45.230 It seemed like they kind of wound up 00:38:45.230 --> 00:38:47.745 in that by accident sort of. 00:38:47.745 --> 00:38:48.370 They're, like-- 00:38:48.370 --> 00:38:49.995 RICHARD SCHMALENSEE: Well, think about. 00:38:49.995 --> 00:38:52.660 I mean there's some nice description of-- 00:38:52.660 --> 00:38:55.180 suppose you're doing Coke bottles, 00:38:55.180 --> 00:38:58.930 and you're running this incredibly rapid bottling 00:38:58.930 --> 00:38:59.560 apparatus. 00:38:59.560 --> 00:39:01.727 And you produce the bottles and you fill the bottles 00:39:01.727 --> 00:39:02.380 under pressure. 00:39:02.380 --> 00:39:05.990 What matters a lot? 00:39:05.990 --> 00:39:09.560 Quality, maybe, defects, maybe, because when 00:39:09.560 --> 00:39:12.530 a bottle explodes and you've got to stop the line, 00:39:12.530 --> 00:39:14.390 that's terrible. 00:39:14.390 --> 00:39:18.095 So performance and technology matter in those segments. 00:39:18.095 --> 00:39:20.553 AUDIENCE: They're not making the blow molded machines, only 00:39:20.553 --> 00:39:21.443 the preformed. 00:39:21.443 --> 00:39:22.860 RICHARD SCHMALENSEE: Yeah, but you 00:39:22.860 --> 00:39:24.392 want to make those free of defects. 00:39:24.392 --> 00:39:26.100 AUDIENCE: Because when you blow them up-- 00:39:26.100 --> 00:39:28.222 RICHARD SCHMALENSEE: When you blow them up, yeah. 00:39:28.222 --> 00:39:30.180 I think there's a number in the case about sort 00:39:30.180 --> 00:39:31.800 of typical defects in one of theirs 00:39:31.800 --> 00:39:33.690 versus typical defects in competitors. 00:39:33.690 --> 00:39:35.410 And it's a big difference. 00:39:35.410 --> 00:39:38.640 And the story is when you blow them up, 00:39:38.640 --> 00:39:41.640 and then you fill them under pressure, 00:39:41.640 --> 00:39:45.570 and they explode and stop a bottling line, that's terrible. 00:39:45.570 --> 00:39:48.270 So if you can deliver product that won't do that, 00:39:48.270 --> 00:39:49.590 you've got an advantage. 00:39:49.590 --> 00:39:50.580 OK. 00:39:50.580 --> 00:39:54.840 So it's segments where performance matters, 00:39:54.840 --> 00:39:56.400 where technology is useful. 00:39:59.533 --> 00:40:01.450 One of the things that comes out in the case-- 00:40:01.450 --> 00:40:03.450 you have to read it kind of closely to get this, 00:40:03.450 --> 00:40:07.800 but it buys a lot of stuff. 00:40:07.800 --> 00:40:11.910 It makes the molds, but it buys a lot of inputs, 00:40:11.910 --> 00:40:13.290 more than its competitors. 00:40:13.290 --> 00:40:14.340 Any obvious reason? 00:40:20.610 --> 00:40:21.970 Catherine. 00:40:21.970 --> 00:40:25.320 AUDIENCE: Well, doesn't the case that their campuses 00:40:25.320 --> 00:40:26.640 are very centralized. 00:40:26.640 --> 00:40:30.960 And it goes back to the culture, their employees 00:40:30.960 --> 00:40:32.560 are generally very happy there. 00:40:32.560 --> 00:40:35.040 So it said that they buy a lot of their molds 00:40:35.040 --> 00:40:38.060 from people who generally were former employees so 00:40:38.060 --> 00:40:39.888 [INAUDIBLE]. 00:40:39.888 --> 00:40:42.430 RICHARD SCHMALENSEE: So they buy a lot from former employees, 00:40:42.430 --> 00:40:43.020 yeah. 00:40:43.020 --> 00:40:46.650 So that's part of the ecosystem, as the phrase goes. 00:40:49.440 --> 00:40:52.170 But as focused as they are on technical excellence 00:40:52.170 --> 00:40:55.750 of their machines, could they do that 00:40:55.750 --> 00:40:57.520 for everything, all the inputs? 00:41:02.240 --> 00:41:06.890 AUDIENCE: Instead of trying to just manufacture products, 00:41:06.890 --> 00:41:08.780 they have a focus on service and the entire-- 00:41:08.780 --> 00:41:10.280 RICHARD SCHMALENSEE: They focus on-- 00:41:10.280 --> 00:41:12.530 AUDIENCE: --package, basically. 00:41:12.530 --> 00:41:15.709 So they try to specialize more because then they 00:41:15.709 --> 00:41:18.042 can provide more services throughout the company so that 00:41:18.042 --> 00:41:19.020 [INAUDIBLE]. 00:41:19.020 --> 00:41:20.260 RICHARD SCHMALENSEE: So they have technical people 00:41:20.260 --> 00:41:20.990 out in the field. 00:41:20.990 --> 00:41:23.530 So they can provide a great deal of service, 00:41:23.530 --> 00:41:26.320 and sort of co-engineering with their clients. 00:41:26.320 --> 00:41:30.040 And they're in segments where that matters. 00:41:30.040 --> 00:41:35.500 And trying to do that for all of the components, 00:41:35.500 --> 00:41:38.920 and trying to hyper-engineer all of their components 00:41:38.920 --> 00:41:40.930 would spread them a little thin, I think. 00:41:40.930 --> 00:41:44.920 And I think that's one reason why 00:41:44.920 --> 00:41:47.980 they make fewer inputs than their competitors, 00:41:47.980 --> 00:41:52.450 because they've decided to focus on the parts of the business 00:41:52.450 --> 00:41:55.120 where performance and quality and technology matter. 00:41:58.480 --> 00:41:59.650 What's the answer to that? 00:41:59.650 --> 00:42:04.890 They make some molds, particularly for PET. 00:42:04.890 --> 00:42:08.520 They offer hot runners, and a variety of other things that 00:42:08.520 --> 00:42:10.270 competitors don't. 00:42:10.270 --> 00:42:12.780 Any reasons why? 00:42:12.780 --> 00:42:13.540 Wyatt. 00:42:13.540 --> 00:42:16.320 AUDIENCE: It said in the reading with the hot runners was 00:42:16.320 --> 00:42:18.270 they were selling the hot runners to Gillette 00:42:18.270 --> 00:42:22.770 or whatever, but Gillette wasn't using their actual mold 00:42:22.770 --> 00:42:23.517 machines. 00:42:23.517 --> 00:42:24.600 They're using hot runners. 00:42:24.600 --> 00:42:27.070 And then later on, they were able to grab 00:42:27.070 --> 00:42:29.770 a contract with Gillette before the actual [INAUDIBLE].. 00:42:29.770 --> 00:42:31.770 RICHARD SCHMALENSEE: So it's part of the system. 00:42:31.770 --> 00:42:34.860 Being good at that adds to performance 00:42:34.860 --> 00:42:36.330 and gives you a business edge. 00:42:36.330 --> 00:42:39.900 And they're very tightly focused on these two segments. 00:42:39.900 --> 00:42:43.620 So you want to make everything you can for those segments. 00:42:43.620 --> 00:42:46.580 You want to not worry about the inputs. 00:42:52.620 --> 00:42:54.390 And it's made a lot of money. 00:42:54.390 --> 00:42:56.970 The case makes it clear-- it's grown like gangbusters. 00:42:56.970 --> 00:43:00.720 It's got a return on equity of something like 40%. 00:43:00.720 --> 00:43:05.220 Why, at least until recently, hasn't anybody copied them? 00:43:05.220 --> 00:43:06.930 What are the barriers to imitation? 00:43:06.930 --> 00:43:10.470 What has made this strategy sustainable, 00:43:10.470 --> 00:43:11.370 at least for a while. 00:43:11.370 --> 00:43:12.210 Nothing's forever. 00:43:12.210 --> 00:43:13.320 Brendan. 00:43:13.320 --> 00:43:16.478 AUDIENCE: They have a huge technological advantage. 00:43:16.478 --> 00:43:18.145 Their machines are a lot more expensive. 00:43:18.145 --> 00:43:20.140 There's a deep knowledge base there. 00:43:20.140 --> 00:43:22.555 So it's hard to copy the kind of quality machines 00:43:22.555 --> 00:43:23.780 that they produce. 00:43:23.780 --> 00:43:26.072 RICHARD SCHMALENSEE: But you could imagine they don't-- 00:43:26.072 --> 00:43:27.590 nobody talks about patents, though. 00:43:27.590 --> 00:43:29.570 We don't hear patent barriers. 00:43:29.570 --> 00:43:32.990 So you could imagine they have the only advanced manufacturing 00:43:32.990 --> 00:43:33.740 center. 00:43:33.740 --> 00:43:35.670 They've set up a little think tank-- 00:43:35.670 --> 00:43:36.920 I don't know how little it is. 00:43:36.920 --> 00:43:40.400 They set up a think tank to do R&D. Why 00:43:40.400 --> 00:43:41.920 don't other people do that? 00:43:41.920 --> 00:43:43.837 AUDIENCE: They don't want to invest the money. 00:43:43.837 --> 00:43:47.920 They'd rather spend the money elsewhere, not have that cost. 00:43:47.920 --> 00:43:50.770 RICHARD SCHMALENSEE: So this is part of-- 00:43:53.350 --> 00:43:55.990 well, let me push you on that a little bit, 00:43:55.990 --> 00:43:58.810 because they're making so much money. 00:43:58.810 --> 00:44:00.610 They're growing like gangbusters. 00:44:00.610 --> 00:44:02.830 They're making so much money. 00:44:02.830 --> 00:44:05.020 Wouldn't you imitate them if you could? 00:44:05.020 --> 00:44:09.710 I mean, so yeah, you got to set up a manufacturing center. 00:44:09.710 --> 00:44:10.750 These are big companies. 00:44:10.750 --> 00:44:12.670 Mannesmann is a big company. 00:44:12.670 --> 00:44:14.740 AUDIENCE: That's why companies eventually 00:44:14.740 --> 00:44:17.710 did kind of get into the markets that they were selling. 00:44:17.710 --> 00:44:19.370 RICHARD SCHMALENSEE: They saw it, yeah. 00:44:19.370 --> 00:44:20.870 AUDIENCE: They sold cheaper machines 00:44:20.870 --> 00:44:23.162 that can do the same job, maybe not to the same quality 00:44:23.162 --> 00:44:23.718 but close. 00:44:23.718 --> 00:44:25.760 RICHARD SCHMALENSEE: And try to come in on price. 00:44:25.760 --> 00:44:26.438 Yeah. 00:44:26.438 --> 00:44:27.980 AUDIENCE: Isn't the kind of customer, 00:44:27.980 --> 00:44:29.320 though, that's concerned about quality 00:44:29.320 --> 00:44:31.300 and is willing to pay more for it, like it would make 00:44:31.300 --> 00:44:33.883 more sense it would go with the company that had been doing it 00:44:33.883 --> 00:44:36.670 for longer and kind of has the history and reputation, rather 00:44:36.670 --> 00:44:39.940 than a company that has just copied their technology 00:44:39.940 --> 00:44:42.930 and is getting that niche of the market 00:44:42.930 --> 00:44:44.507 and doesn't have the reputation. 00:44:44.507 --> 00:44:46.590 RICHARD SCHMALENSEE: And they really sort of built 00:44:46.590 --> 00:44:48.820 the company to do this, haven't they? 00:44:48.820 --> 00:44:49.320 [INAUDIBLE] 00:44:49.320 --> 00:44:53.140 AUDIENCE: Well, my guess would be that if you try to imitate, 00:44:53.140 --> 00:44:55.080 you're effectively increasing competition 00:44:55.080 --> 00:44:58.110 that does make the business not as profitable as it 00:44:58.110 --> 00:44:59.680 would be otherwise. 00:44:59.680 --> 00:45:02.387 RICHARD SCHMALENSEE: So the segment may not be that big, 00:45:02.387 --> 00:45:02.970 you're saying. 00:45:02.970 --> 00:45:04.770 And so you'd have to do the numbers to say, 00:45:04.770 --> 00:45:06.930 is there room for two of us to play this game? 00:45:06.930 --> 00:45:07.560 Maxwell. 00:45:07.560 --> 00:45:09.060 AUDIENCE: I think also it has a lot 00:45:09.060 --> 00:45:10.602 to do with the culture of the company 00:45:10.602 --> 00:45:13.060 and you needed that culture to make machines. 00:45:13.060 --> 00:45:15.077 It's hard to switch an entire culture. 00:45:15.077 --> 00:45:16.660 RICHARD SCHMALENSEE: Yeah, the culture 00:45:16.660 --> 00:45:19.160 is sort of part of it, is an intriguing part of it, 00:45:19.160 --> 00:45:19.660 isn't it? 00:45:19.660 --> 00:45:21.073 They've got a peculiar culture. 00:45:21.073 --> 00:45:22.240 I want to come back to that. 00:45:22.240 --> 00:45:23.020 Charlotte. 00:45:23.020 --> 00:45:25.660 AUDIENCE: Also, the fact that we said 00:45:25.660 --> 00:45:27.370 they're only focusing on this one thing, 00:45:27.370 --> 00:45:29.320 whereas other companies that were also 00:45:29.320 --> 00:45:31.990 in the mold-making business focused more widely. 00:45:31.990 --> 00:45:35.830 Even when they started to come into this area, 00:45:35.830 --> 00:45:38.530 they sort of added onto machines they already had, 00:45:38.530 --> 00:45:43.030 instead of actually changing into the same company. 00:45:43.030 --> 00:45:45.550 Nobody shut down all their other manufacturing 00:45:45.550 --> 00:45:48.220 and focused specifically on these two things. 00:45:48.220 --> 00:45:51.100 They just incorporated it into what they were already doing. 00:45:51.100 --> 00:45:53.110 Maybe companies [INAUDIBLE] they calculated 00:45:53.110 --> 00:45:55.870 what it would take for them to get to the point 00:45:55.870 --> 00:45:56.860 where Husky was. 00:45:56.860 --> 00:45:58.970 It would just have changed their [INAUDIBLE].. 00:45:58.970 --> 00:46:00.720 RICHARD SCHMALENSEE: So this would sort of 00:46:00.720 --> 00:46:02.920 be a little bit of the reverse of Continental 00:46:02.920 --> 00:46:04.150 versus Continental Light. 00:46:04.150 --> 00:46:07.450 This would be like, well, they tried it. 00:46:07.450 --> 00:46:09.850 This would be like grafting a luxury car 00:46:09.850 --> 00:46:12.490 business onto Volkswagen, or as Toyota 00:46:12.490 --> 00:46:17.148 did, doing Lexus, which they set off to one side 00:46:17.148 --> 00:46:19.690 because you really couldn't do the mainstream Toyota business 00:46:19.690 --> 00:46:23.170 and the Lexus business under the same management. 00:46:23.170 --> 00:46:27.370 So part of it is they really built it for this. 00:46:27.370 --> 00:46:29.680 Do you think it has higher or lower than average costs? 00:46:29.680 --> 00:46:30.888 That's pretty clear, I think. 00:46:34.030 --> 00:46:35.650 Matthew, what do you think? 00:46:35.650 --> 00:46:38.020 You think Husky's a high cost operation or a low cost 00:46:38.020 --> 00:46:40.150 operation? 00:46:40.150 --> 00:46:44.985 AUDIENCE: Well, they're high in the sense of charging-- 00:46:44.985 --> 00:46:47.110 RICHARD SCHMALENSEE: No, not in terms of high price 00:46:47.110 --> 00:46:50.530 but in terms of their cost. 00:46:50.530 --> 00:46:53.140 Even though they've got this lab on the side, 00:46:53.140 --> 00:46:55.360 they've got this advanced manufacturing center. 00:46:55.360 --> 00:46:56.740 They've got day care. 00:46:56.740 --> 00:46:58.660 They're very ecologically good. 00:46:58.660 --> 00:47:03.310 AUDIENCE: They're charging high scores that nobody can produce. 00:47:03.310 --> 00:47:07.968 [INAUDIBLE] So I'm saying low in comparison 00:47:07.968 --> 00:47:09.010 to what they're charging. 00:47:09.010 --> 00:47:11.135 RICHARD SCHMALENSEE: That may be, but in comparison 00:47:11.135 --> 00:47:12.550 to their competitors? 00:47:12.550 --> 00:47:13.390 AUDIENCE: They're higher, because they're 00:47:13.390 --> 00:47:14.530 producing higher quality. 00:47:14.530 --> 00:47:16.780 RICHARD SCHMALENSEE: They're producing higher quality. 00:47:16.780 --> 00:47:19.540 And if you think about the culture and everything else, 00:47:19.540 --> 00:47:23.410 this is not a company that skimps. 00:47:23.410 --> 00:47:25.570 This is not a company that skimps. 00:47:25.570 --> 00:47:28.933 They invest in R&D. They invest in technology. 00:47:28.933 --> 00:47:30.100 They invest in their people. 00:47:33.730 --> 00:47:36.850 Do you think that's important, the culture? 00:47:36.850 --> 00:47:41.555 Is that a key part of the story, do you think? 00:47:41.555 --> 00:47:43.430 Not sure I know the answer to this, but yeah. 00:47:43.430 --> 00:47:44.892 AUDIENCE: I think it is. 00:47:44.892 --> 00:47:46.600 Just you mentioned before, it's something 00:47:46.600 --> 00:47:48.642 you can get up in the morning and go to work for. 00:47:48.642 --> 00:47:51.720 It keeps people motivated, keeps your workforce working hard. 00:47:51.720 --> 00:47:53.070 RICHARD SCHMALENSEE: Even getting your T-square-- 00:47:53.070 --> 00:47:55.528 imagine T-squares-- even getting your T-square straightened 00:47:55.528 --> 00:47:57.510 on your desk, you think? 00:47:57.510 --> 00:48:03.540 I mean, neatening your code when you're gone. 00:48:03.540 --> 00:48:05.583 It's an interesting culture, I have to say. 00:48:05.583 --> 00:48:07.000 Matthew, you're raising your hand. 00:48:07.000 --> 00:48:07.960 Yeah. 00:48:07.960 --> 00:48:09.540 AUDIENCE: I mean, they said in there 00:48:09.540 --> 00:48:12.360 that whenever they extended day care hours, 00:48:12.360 --> 00:48:15.070 it was a kind of thing to make them work harder, 00:48:15.070 --> 00:48:18.892 not just for extended day care hours for the kids. 00:48:18.892 --> 00:48:21.100 RICHARD SCHMALENSEE: Well, they're not doing charity, 00:48:21.100 --> 00:48:21.600 are they? 00:48:21.600 --> 00:48:26.290 But they have a particular culture of we value our people. 00:48:26.290 --> 00:48:27.610 We value the environment. 00:48:27.610 --> 00:48:32.150 We value excellence, which would be a tough culture 00:48:32.150 --> 00:48:37.400 to sustain if they were aiming for the low end of the market. 00:48:37.400 --> 00:48:40.850 If you're aiming for the low end, that's tough. 00:48:40.850 --> 00:48:43.880 If you're aiming for the high end, 00:48:43.880 --> 00:48:48.200 it's like Ritz-Carlton Hotels aim for a particular kind 00:48:48.200 --> 00:48:49.880 of service. 00:48:49.880 --> 00:48:53.150 And their code is ladies and gentlemen 00:48:53.150 --> 00:48:55.250 served by ladies and gentlemen. 00:48:55.250 --> 00:48:57.770 If you're going to treat your people like ladies 00:48:57.770 --> 00:49:02.130 and gentlemen, you're going to have higher costs than if you 00:49:02.130 --> 00:49:03.770 treat them like pond scum. 00:49:03.770 --> 00:49:07.780 You will also, with some luck, get better service. 00:49:07.780 --> 00:49:10.600 So this is a culture that really does aim high. 00:49:10.600 --> 00:49:11.820 Would you like to work there? 00:49:16.650 --> 00:49:20.730 Show of hands-- who'd like to work for this company. 00:49:20.730 --> 00:49:25.590 OK, who would find it really awful? 00:49:25.590 --> 00:49:28.260 Charlotte would not like her T-square straightened. 00:49:28.260 --> 00:49:30.330 Neither would Maxwell. 00:49:30.330 --> 00:49:33.090 I mean, it's for some people and not for others. 00:49:33.090 --> 00:49:35.570 It's autocratic. 00:49:35.570 --> 00:49:37.573 The boss runs it. 00:49:37.573 --> 00:49:39.740 One of the questions that's suggested for discussion 00:49:39.740 --> 00:49:46.400 is, could you do this company without Shapp 00:49:46.400 --> 00:49:49.740 in charge, Schad, rather. 00:49:49.740 --> 00:49:51.470 Could you do this without an autocrat 00:49:51.470 --> 00:49:57.040 in charge, such a strong culture, such a tight focus? 00:49:57.040 --> 00:49:59.745 Not obvious. 00:49:59.745 --> 00:50:00.245 OK. 00:50:03.340 --> 00:50:05.020 What else do I want to do? 00:50:05.020 --> 00:50:08.415 This is some numbers, which I don't expect you to have done. 00:50:08.415 --> 00:50:09.790 And I should have made this clear 00:50:09.790 --> 00:50:13.660 because you can do a fair amount of work on the numbers. 00:50:13.660 --> 00:50:16.810 And I'll illustrate this kind of analysis. 00:50:16.810 --> 00:50:24.010 For products like this, it is often useful-- 00:50:24.010 --> 00:50:27.250 and energy products, a lot of them come into this category, 00:50:27.250 --> 00:50:28.420 like light bulbs-- 00:50:28.420 --> 00:50:32.770 you can do the demand analysis by simply turning yourself 00:50:32.770 --> 00:50:35.800 around and thinking about this as a buyer. 00:50:35.800 --> 00:50:38.290 If you were a buyer producing bottles, 00:50:38.290 --> 00:50:40.480 what would you be willing to pay for a Husky 00:50:40.480 --> 00:50:43.540 system versus some other system, given the parameters? 00:50:43.540 --> 00:50:46.090 And that gives you a sense of what Husky can charge, 00:50:46.090 --> 00:50:47.800 given other people's. 00:50:47.800 --> 00:50:54.520 It's easier when it's something like we're making bottles. 00:50:54.520 --> 00:50:56.538 It's a little harder when we're making Priuses, 00:50:56.538 --> 00:50:58.330 because you don't know what the willingness 00:50:58.330 --> 00:51:04.390 to pay for intangibles is, or hardwood interiors in a car. 00:51:04.390 --> 00:51:08.440 That you can't sort of read off the process figures. 00:51:08.440 --> 00:51:12.070 But for something like light bulbs, 00:51:12.070 --> 00:51:15.550 for something like injection molding machines, you can say, 00:51:15.550 --> 00:51:17.200 OK, I'm running a factory. 00:51:17.200 --> 00:51:20.810 What would I buy at different prices, 00:51:20.810 --> 00:51:23.170 and turn the analysis around. 00:51:23.170 --> 00:51:26.472 And I'll just show you the results. 00:51:26.472 --> 00:51:28.930 These aren't my numbers, these are somebody else's numbers, 00:51:28.930 --> 00:51:32.230 but it's useful for this kind of analysis. 00:51:32.230 --> 00:51:37.060 You basically want to say, start with the rival. 00:51:37.060 --> 00:51:43.270 What would it cost in terms of the machine, maybe the fact 00:51:43.270 --> 00:51:45.490 that you've got to get more machines because it's not 00:51:45.490 --> 00:51:47.410 as productive, the fact that maybe it 00:51:47.410 --> 00:51:50.680 takes more energy, the fact that it takes more raw materials-- 00:51:50.680 --> 00:51:53.770 what would it cost you-- this is called p star-- 00:51:53.770 --> 00:51:58.150 to do what you'd get out of a Husky system for price p? 00:51:58.150 --> 00:52:00.550 There's enough in the case you can do this, 00:52:00.550 --> 00:52:06.010 if you're very ambitious, for thin walls and for PET systems. 00:52:06.010 --> 00:52:11.140 This is a calculation for thin wall. 00:52:11.140 --> 00:52:15.880 The competitors-- use margarine containers-- 00:52:15.880 --> 00:52:20.020 the competitor's system has a longer cycle time, 00:52:20.020 --> 00:52:25.660 it produces heavier components, a heavier weight container. 00:52:25.660 --> 00:52:27.910 It costs less. 00:52:27.910 --> 00:52:30.980 So to get the same output, again, 00:52:30.980 --> 00:52:33.010 this assumes you have a large factory, 00:52:33.010 --> 00:52:38.320 you'd need 1 and 2/3 competitor machines to get as much 00:52:38.320 --> 00:52:40.990 as out of a Husky machine. 00:52:40.990 --> 00:52:46.600 That means 1 and 2/3 times 350 is 408. 00:52:46.600 --> 00:52:51.310 There's also a resin saving, because the Husky container 00:52:51.310 --> 00:52:53.020 is lighter. 00:52:53.020 --> 00:52:58.240 So to replace a $400,000 Husky machine, 00:52:58.240 --> 00:53:04.720 you'd have to do $408,000 worth of competitor equipment 00:53:04.720 --> 00:53:08.230 plus extra resin per year. 00:53:08.230 --> 00:53:10.630 That's a willingness to pay analysis. 00:53:10.630 --> 00:53:13.660 So that says Husky could, depending 00:53:13.660 --> 00:53:17.050 on how the competitor discounted, and depending 00:53:17.050 --> 00:53:19.420 on how much the competitor produced, 00:53:19.420 --> 00:53:22.660 Husky could charge even more than $400,000 00:53:22.660 --> 00:53:25.960 and would still be the machine of choice. 00:53:25.960 --> 00:53:28.000 This is the kind of analysis you would 00:53:28.000 --> 00:53:32.770 expect a buyer to do, deciding what kind of machine to buy. 00:53:32.770 --> 00:53:35.560 And it's the kind of analysis you'd expect Husky 00:53:35.560 --> 00:53:37.975 to do in thinking about price. 00:53:41.020 --> 00:53:44.230 In the past, I've taught a pricing course here at Sloan. 00:53:44.230 --> 00:53:49.120 And my favorite case is a case about contact lenses 00:53:49.120 --> 00:53:51.160 for chickens. 00:53:51.160 --> 00:53:55.660 And it's a great pricing case because the contact lenses 00:53:55.660 --> 00:54:00.340 for chickens cost nothing. 00:54:00.340 --> 00:54:03.250 You put them in the chicken for about $0.25 a chicken. 00:54:03.250 --> 00:54:05.080 They cost about a penny. 00:54:05.080 --> 00:54:07.060 And they keep the chickens, if they work, 00:54:07.060 --> 00:54:09.630 from pecking each other to death. 00:54:09.630 --> 00:54:11.710 And if you do the calculation, you 00:54:11.710 --> 00:54:15.130 find those lenses are worth about $4 apiece-- 00:54:15.130 --> 00:54:18.490 made up number, but very, very high. 00:54:18.490 --> 00:54:21.640 And most people in the class immediately say, well, 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. 00:54:26.560 --> 00:54:27.803 And the answer is no. 00:54:27.803 --> 00:54:29.470 If you do the willingness to pay answer, 00:54:29.470 --> 00:54:32.830 you can mark it up to $3 as long as you've 00:54:32.830 --> 00:54:35.080 got the patent monopoly on it. 00:54:35.080 --> 00:54:37.030 The buyer would be willing to pay $3 00:54:37.030 --> 00:54:39.170 rather than do without it. 00:54:39.170 --> 00:54:42.550 And in fact, if it's worth $4 on this kind of analysis, 00:54:42.550 --> 00:54:46.510 you charge $3 and they're happy. 00:54:46.510 --> 00:54:48.160 So this is a kind of analysis you 00:54:48.160 --> 00:54:51.787 can do for industrial products. 00:54:51.787 --> 00:54:53.620 That's a great case, except as it turns out, 00:54:53.620 --> 00:54:55.420 the contact lenses fell out of the chickens. 00:54:55.420 --> 00:54:57.640 The chickens plucked each other to death and the firm 00:54:57.640 --> 00:54:58.140 went broke. 00:54:58.140 --> 00:55:03.520 But still, it's a great case to teach. 00:55:03.520 --> 00:55:06.550 It fails only the realistic test. 00:55:06.550 --> 00:55:11.620 This says the more containers somebody wants to produce, 00:55:11.620 --> 00:55:14.240 and the lower their discount rate, 00:55:14.240 --> 00:55:16.990 the better the Husky system is. 00:55:16.990 --> 00:55:21.250 This is a similar analysis, a willingness to pay analysis, 00:55:21.250 --> 00:55:24.080 for a PET preform system. 00:55:24.080 --> 00:55:31.450 And again, the Husky container weight is lower. 00:55:31.450 --> 00:55:37.680 The cost is lower, takes up-- well, 00:55:37.680 --> 00:55:41.180 I'm going to have to go back. 00:55:41.180 --> 00:55:43.880 The key things you see will turn out 00:55:43.880 --> 00:55:50.070 to be the energy savings and the resin savings. 00:55:50.070 --> 00:55:54.170 So what you get here is it produces a lighter container, 00:55:54.170 --> 00:55:55.460 so there's a resin saving. 00:55:55.460 --> 00:55:57.860 It's more efficient, so there's an energy saving. 00:55:57.860 --> 00:56:00.440 There's also a little floor space saving. 00:56:00.440 --> 00:56:02.480 So it's the same thing-- 00:56:02.480 --> 00:56:06.680 to replace a Husky system costing $1.2 million, 00:56:06.680 --> 00:56:13.220 you'd need to spend more capacity and more yearly cost. 00:56:13.220 --> 00:56:20.230 So again, when you think about an industrial product, 00:56:20.230 --> 00:56:24.190 this is the sort of analysis you go through. 00:56:24.190 --> 00:56:26.830 When you're a buyer you do it, and when you're a seller 00:56:26.830 --> 00:56:27.520 you do it. 00:56:27.520 --> 00:56:30.340 Now again, the analysis may be different 00:56:30.340 --> 00:56:32.330 for different customers. 00:56:32.330 --> 00:56:39.530 This is a case where you're assuming that, again, I can-- 00:56:39.530 --> 00:56:40.490 where have I got it? 00:56:40.490 --> 00:56:46.040 Yeah, I need 1.34 rival systems to replace a Husky system 00:56:46.040 --> 00:56:48.590 because the Husky system is more productive. 00:56:48.590 --> 00:56:51.380 Well, depending on how big the factory is, 00:56:51.380 --> 00:56:52.940 that may or may not make any sense 00:56:52.940 --> 00:56:55.370 because they don't come in fractions. 00:56:55.370 --> 00:56:57.500 If it's a large thing, yeah. 00:56:57.500 --> 00:57:01.010 If the typical customer has one system, 00:57:01.010 --> 00:57:03.980 then the analysis is going to be different. 00:57:03.980 --> 00:57:10.040 OK, any questions about this kind of analysis? 00:57:10.040 --> 00:57:12.200 Folks with an engineering background, 00:57:12.200 --> 00:57:14.180 this sort of ought to come pretty naturally, 00:57:14.180 --> 00:57:17.900 just working out on a spreadsheet. 00:57:17.900 --> 00:57:21.640 What would you do if you didn't buy ours? 00:57:21.640 --> 00:57:22.480 How would you do it? 00:57:22.480 --> 00:57:23.970 What would it cost? 00:57:23.970 --> 00:57:27.500 Is there a gap? 00:57:27.500 --> 00:57:33.460 So the answer to this is, at least as of 1995 00:57:33.460 --> 00:57:40.600 before troubles begin, Husky systems are worth-- 00:57:40.600 --> 00:57:44.020 I mean, we're charging $1.2 million for the system, 00:57:44.020 --> 00:57:46.420 but to replace it, you'd have to spend 00:57:46.420 --> 00:57:50.210 $1.3 plus $500,000 a year. 00:57:50.210 --> 00:57:54.897 So in one sense, we are leaving a little money on the table. 00:57:54.897 --> 00:57:56.980 In another sense, you have to leave a little money 00:57:56.980 --> 00:58:00.350 on the table because these are approximate calculations. 00:58:00.350 --> 00:58:05.650 But the answer is, Husky's systems justified their premium 00:58:05.650 --> 00:58:09.430 price going into 1995. 00:58:09.430 --> 00:58:12.940 The electricity savings were not a trivial part 00:58:12.940 --> 00:58:16.360 of the reason, at least for PET preform. 00:58:16.360 --> 00:58:18.580 Is this reasonably straightforward, 00:58:18.580 --> 00:58:20.860 how you would think about doing it-- 00:58:20.860 --> 00:58:23.500 just engineer it one way, engineer it the other way, 00:58:23.500 --> 00:58:26.755 and check the costs, all the costs? 00:58:31.100 --> 00:58:33.320 We're now in 1995. 00:58:33.320 --> 00:58:34.180 What's gone wrong? 00:58:38.350 --> 00:58:39.333 It's the summer of '95. 00:58:39.333 --> 00:58:40.250 They had a great year. 00:58:40.250 --> 00:58:41.230 They're depressed. 00:58:41.230 --> 00:58:42.180 Yes. 00:58:42.180 --> 00:58:44.643 AUDIENCE: Resin costs are increasing. 00:58:44.643 --> 00:58:46.810 RICHARD SCHMALENSEE: OK, resin costs are increasing. 00:58:46.810 --> 00:58:50.110 That's leading to a decrease in demand. 00:58:50.110 --> 00:58:52.720 Is that likely to be a temporary or a permanent situation, 00:58:52.720 --> 00:58:53.770 do you think? 00:58:53.770 --> 00:58:54.947 Temporary, yeah. 00:58:54.947 --> 00:58:56.280 It's going to be disequilibrium. 00:58:56.280 --> 00:58:57.310 We've seen it before. 00:58:57.310 --> 00:58:58.900 It's a commodity chemical. 00:58:58.900 --> 00:59:00.560 They just have a capacity shortage. 00:59:00.560 --> 00:59:04.430 So we wouldn't get too twitchy about that. 00:59:04.430 --> 00:59:05.937 Anything else, Matthew? 00:59:05.937 --> 00:59:07.520 AUDIENCE: A lot of competing companies 00:59:07.520 --> 00:59:09.100 have noticed their success and are 00:59:09.100 --> 00:59:11.350 starting to step in and try to take some market share. 00:59:11.350 --> 00:59:13.100 RICHARD SCHMALENSEE: Now we got a problem. 00:59:13.100 --> 00:59:14.575 That's more serious. 00:59:20.110 --> 00:59:22.750 And these guys have been through resin shortages, 00:59:22.750 --> 00:59:24.190 and they don't have a lot of debt, 00:59:24.190 --> 00:59:26.590 and they'll probably get through this one. 00:59:26.590 --> 00:59:30.700 In fact, I think it fixed itself within a year, maybe two. 00:59:30.700 --> 00:59:32.620 But the lower cost competitors going 00:59:32.620 --> 00:59:37.630 after your prime customers with lower costs-- 00:59:37.630 --> 00:59:39.970 that's troublesome. 00:59:39.970 --> 00:59:43.550 So let's look at this two ways. 00:59:43.550 --> 00:59:47.500 Let's look at it from the point of view first of a competitor. 00:59:47.500 --> 00:59:50.950 Suppose you're one of those low cost competitors. 00:59:50.950 --> 00:59:53.890 You know Husky's going to do something. 00:59:53.890 --> 00:59:57.590 What do you think Husky is going to do? 00:59:57.590 --> 00:59:59.450 One question is what will they do, 00:59:59.450 --> 01:00:02.750 and what would you think they would do as a competitor? 01:00:02.750 --> 01:00:05.720 And the other is what would you recommend they do? 01:00:05.720 --> 01:00:09.740 Those may be the same if they're as smart as you are. 01:00:09.740 --> 01:00:12.860 But they may not be. 01:00:12.860 --> 01:00:14.970 Any thoughts about you're a competitor. 01:00:14.970 --> 01:00:18.610 What do you think Husky does? 01:00:18.610 --> 01:00:19.460 Sam. 01:00:19.460 --> 01:00:20.860 AUDIENCE: Talk to their customers 01:00:20.860 --> 01:00:22.720 and stress the quality of the product. 01:00:22.720 --> 01:00:23.800 Because these guys are new, and they're 01:00:23.800 --> 01:00:25.130 doing low cost, but the only way they 01:00:25.130 --> 01:00:26.290 do that is they're cutting corners. 01:00:26.290 --> 01:00:27.640 Like, our product's more expensive, 01:00:27.640 --> 01:00:29.140 but you've worked with us for years. 01:00:29.140 --> 01:00:31.570 You know it's trustworthy, and just [INAUDIBLE] 01:00:31.570 --> 01:00:33.910 RICHARD SCHMALENSEE: So you think what 01:00:33.910 --> 01:00:35.590 they would do would be to-- 01:00:35.590 --> 01:00:39.400 because they've always been about technology, 01:00:39.400 --> 01:00:41.590 and technological leadership, and quality, 01:00:41.590 --> 01:00:43.835 they're just going to double down on that. 01:00:43.835 --> 01:00:45.460 They're going to do more communication. 01:00:45.460 --> 01:00:47.135 They're going to do more innovation. 01:00:47.135 --> 01:00:48.010 AUDIENCE: [INAUDIBLE] 01:00:48.010 --> 01:00:49.210 RICHARD SCHMALENSEE: They're going to ride the same horse. 01:00:49.210 --> 01:00:51.220 AUDIENCE: That's what I think they should do. 01:00:51.220 --> 01:00:53.450 RICHARD SCHMALENSEE: What do you think they will do? 01:00:53.450 --> 01:00:55.408 AUDIENCE: Probably, I feel like the first thing 01:00:55.408 --> 01:00:57.670 they may try and do is lower their costs, 01:00:57.670 --> 01:00:59.054 drop their prices a little bit. 01:00:59.054 --> 01:01:01.535 I don't think that's what they should do, 01:01:01.535 --> 01:01:02.960 but that's what [INAUDIBLE]. 01:01:02.960 --> 01:01:06.200 RICHARD SCHMALENSEE: Why do you think they will do it? 01:01:06.200 --> 01:01:07.160 You had me sold. 01:01:07.160 --> 01:01:09.650 You had me sold that given their whole culture, 01:01:09.650 --> 01:01:12.680 and given the way the company's been built, that they would 01:01:12.680 --> 01:01:16.615 double down on innovation. 01:01:16.615 --> 01:01:20.030 AUDIENCE: Yeah, I feel like it's easier to lower [INAUDIBLE].. 01:01:20.030 --> 01:01:22.530 RICHARD SCHMALENSEE: It's easier to lower price in response. 01:01:22.530 --> 01:01:24.090 AUDIENCE: I don't think that's the right thing at all. 01:01:24.090 --> 01:01:25.470 RICHARD SCHMALENSEE: Philip, what do you think they will do? 01:01:25.470 --> 01:01:27.710 AUDIENCE: They'll probably lower the price, 01:01:27.710 --> 01:01:34.370 because [INAUDIBLE] willingness to pay of the buyers is 01:01:34.370 --> 01:01:36.620 probably going to decrease because of these low-cost 01:01:36.620 --> 01:01:37.583 competitors-- 01:01:37.583 --> 01:01:39.000 RICHARD SCHMALENSEE: Because what? 01:01:39.000 --> 01:01:41.310 AUDIENCE: Because the low-cost competitors arising. 01:01:41.310 --> 01:01:47.970 So the cost of replacing their product is less of an issue. 01:01:51.290 --> 01:01:54.200 RICHARD SCHMALENSEE: So you think if you're a competitor, 01:01:54.200 --> 01:01:57.944 the first thing you expect them to do is a price cut. 01:01:57.944 --> 01:01:58.610 AUDIENCE: Yeah. 01:01:58.610 --> 01:01:59.610 RICHARD SCHMALENSEE: OK. 01:01:59.610 --> 01:02:00.380 OK. 01:02:00.380 --> 01:02:02.620 Anybody else have any expec-- because that's 01:02:02.620 --> 01:02:05.500 the natural response to a low-cost entrant is to come 01:02:05.500 --> 01:02:09.820 down a bit anybody else? 01:02:09.820 --> 01:02:10.490 David. 01:02:10.490 --> 01:02:13.012 AUDIENCE: I would not expect them to cut their prices, 01:02:13.012 --> 01:02:14.220 just because that kills them. 01:02:14.220 --> 01:02:16.332 That's like a slippery slope thing, 01:02:16.332 --> 01:02:18.790 where their customers will not be willing to pay the higher 01:02:18.790 --> 01:02:19.290 prices. 01:02:19.290 --> 01:02:23.260 And they can't afford to sustain their competitive advantage. 01:02:23.260 --> 01:02:26.795 RICHARD SCHMALENSEE: Well, are you saying what they should do 01:02:26.795 --> 01:02:27.670 or what they will do? 01:02:27.670 --> 01:02:31.215 AUDIENCE: I'm saying as someone, as a competitor, especially 01:02:31.215 --> 01:02:33.340 if I'm part of the larger corporation like the Mann 01:02:33.340 --> 01:02:37.410 Group, I would not expect them to come down to my price, 01:02:37.410 --> 01:02:41.233 rather they try to stay high, maybe that person will 01:02:41.233 --> 01:02:42.460 buy a little into-- 01:02:42.460 --> 01:02:46.300 RICHARD SCHMALENSEE: So you think that Schad would say, 01:02:46.300 --> 01:02:49.420 I can't play a price game with these guys. 01:02:49.420 --> 01:02:51.580 I'm going to play my long suit. 01:02:51.580 --> 01:02:53.770 I'm going to stick with technology, and high price, 01:02:53.770 --> 01:02:56.170 and communication, and all of those good things. 01:02:56.170 --> 01:02:58.240 OK, we're going to get-- 01:03:02.004 --> 01:03:04.990 at least the analysis in the teaching note on this case 01:03:04.990 --> 01:03:08.350 says, given what Schad did to get through the '70s, 01:03:08.350 --> 01:03:11.440 you might expect him to double down on technology, 01:03:11.440 --> 01:03:13.090 to keep innovating. 01:03:13.090 --> 01:03:15.160 But what should he do? 01:03:15.160 --> 01:03:19.250 I mean, there are a whole set of things he could do. 01:03:19.250 --> 01:03:21.053 He could cut prices. 01:03:21.053 --> 01:03:22.220 He could cut them generally. 01:03:22.220 --> 01:03:23.560 He could cut them selectively. 01:03:23.560 --> 01:03:25.480 He could cut them in different markets. 01:03:25.480 --> 01:03:27.670 He could cut them in different segments. 01:03:27.670 --> 01:03:30.630 He could enter their segments. 01:03:30.630 --> 01:03:33.460 Husky is a little small in terms of production capacity. 01:03:33.460 --> 01:03:37.910 They might try to get scaled by counterattacking. 01:03:37.910 --> 01:03:41.350 They could cut costs given they're 01:03:41.350 --> 01:03:43.780 facing low-price competition, but they've 01:03:43.780 --> 01:03:48.410 got this culture that's not a cost-focused culture. 01:03:48.410 --> 01:03:51.650 It's a quality-focused, people-focused culture. 01:03:51.650 --> 01:03:58.910 So if you do that, then for sure Charlotte 01:03:58.910 --> 01:04:01.190 won't want to work there, because not only 01:04:01.190 --> 01:04:04.040 do they straighten your T, they cut out child care. 01:04:04.040 --> 01:04:07.460 They do all kinds of other things to cut costs. 01:04:07.460 --> 01:04:11.120 You could either raise or lower all this stuff-- the service, 01:04:11.120 --> 01:04:12.633 the technical people in the field. 01:04:12.633 --> 01:04:14.300 They've got probably a high-priced sales 01:04:14.300 --> 01:04:16.430 force because they're all technical people. 01:04:16.430 --> 01:04:19.460 You could go back to plain, old salespeople. 01:04:19.460 --> 01:04:22.730 You could cut out this advanced manufacturing center, 01:04:22.730 --> 01:04:24.140 which nobody else has got. 01:04:24.140 --> 01:04:25.640 You could stop working on research, 01:04:25.640 --> 01:04:29.120 or you could do more of all of those. 01:04:29.120 --> 01:04:30.260 Whoa, that was cute-- 01:04:32.930 --> 01:04:33.860 bad button. 01:04:33.860 --> 01:04:37.190 You could decide that there really 01:04:37.190 --> 01:04:40.222 are scale economies in building your own inputs 01:04:40.222 --> 01:04:41.180 instead of buying them. 01:04:41.180 --> 01:04:44.330 You could try to integrate upstream. 01:04:44.330 --> 01:04:47.450 Or you could do things I haven't thought of. 01:04:47.450 --> 01:04:51.410 So instead of what would they do, what should they do? 01:04:51.410 --> 01:04:53.780 Sam, you had were doing a should. 01:04:53.780 --> 01:04:54.765 You were saying-- 01:04:54.765 --> 01:04:57.140 AUDIENCE: I was saying they should focus on communicating 01:04:57.140 --> 01:04:58.770 advantage to customers. 01:04:58.770 --> 01:05:04.770 And I also think they probably should raise spending 01:05:04.770 --> 01:05:06.323 on technology. 01:05:06.323 --> 01:05:08.240 RICHARD SCHMALENSEE: And quality and all that. 01:05:08.240 --> 01:05:08.750 AUDIENCE: Yeah. 01:05:08.750 --> 01:05:11.125 RICHARD SCHMALENSEE: Because that's what they're good at. 01:05:11.125 --> 01:05:11.660 OK. 01:05:11.660 --> 01:05:13.270 Max, where are you going? 01:05:13.270 --> 01:05:15.395 AUDIENCE: I think they should do an analysis of who 01:05:15.395 --> 01:05:16.520 their main customers are. 01:05:16.520 --> 01:05:18.410 And they only make a couple 100 machines a year. 01:05:18.410 --> 01:05:19.952 So if all of those machines are going 01:05:19.952 --> 01:05:21.917 to the same customers or similar customers 01:05:21.917 --> 01:05:23.500 and they can probably bank on loyalty, 01:05:23.500 --> 01:05:26.780 then they should focus on communicating the advantages 01:05:26.780 --> 01:05:28.110 because they can sell that. 01:05:28.110 --> 01:05:29.990 But if a lot of those machines are 01:05:29.990 --> 01:05:33.410 going to new companies that are trying to look to reduce costs 01:05:33.410 --> 01:05:35.510 initially, then they might want to think 01:05:35.510 --> 01:05:38.490 about cutting costs to stay competitive in that market. 01:05:38.490 --> 01:05:40.282 RICHARD SCHMALENSEE: So that's interesting. 01:05:40.282 --> 01:05:42.230 So if it's the same customers, then it's 01:05:42.230 --> 01:05:46.010 an advantage to the customer to have only one supplier, 01:05:46.010 --> 01:05:48.720 to have Husky machines throughout. 01:05:48.720 --> 01:05:52.340 So if the growth is coming from sales to customers that already 01:05:52.340 --> 01:05:56.660 have Husky machines, you could stress the fact that look, 01:05:56.660 --> 01:05:57.732 you've got one supplier. 01:05:57.732 --> 01:05:59.690 You've only got to have one set of spare ports. 01:05:59.690 --> 01:06:02.700 You've only got to call one person when it breaks down. 01:06:02.700 --> 01:06:04.383 Be a Husky shop. 01:06:04.383 --> 01:06:06.050 But you're right-- it might be different 01:06:06.050 --> 01:06:09.890 if they were new people and they worry more about upfront cost. 01:06:09.890 --> 01:06:10.940 OK. 01:06:10.940 --> 01:06:11.720 Anybody else? 01:06:11.720 --> 01:06:13.100 Any other approaches? 01:06:13.100 --> 01:06:14.558 Erica. 01:06:14.558 --> 01:06:17.780 AUDIENCE: Would it be unusual to look into cutting costs 01:06:17.780 --> 01:06:19.460 while maintaining quality? 01:06:19.460 --> 01:06:23.740 So I guess investing research into cutting cost 01:06:23.740 --> 01:06:26.400 but maintaining high quality. 01:06:26.400 --> 01:06:27.870 RICHARD SCHMALENSEE: Well, can you 01:06:27.870 --> 01:06:32.045 cut manufacturing costs or you cut out the daycare center? 01:06:32.045 --> 01:06:33.420 You wouldn't cut out the daycare. 01:06:33.420 --> 01:06:34.128 AUDIENCE: No, no. 01:06:34.128 --> 01:06:36.750 [INAUDIBLE] manufacturing costs, like how to produce things 01:06:36.750 --> 01:06:38.250 more efficiently. 01:06:38.250 --> 01:06:41.160 RICHARD SCHMALENSEE: So you'd focus on manufacturing costs. 01:06:41.160 --> 01:06:44.190 Would you also raise-- 01:06:44.190 --> 01:06:47.130 this is a fair amount of cost in here, 01:06:47.130 --> 01:06:49.170 having this high-priced field force, 01:06:49.170 --> 01:06:51.810 this advanced manufacturing center, the spending 01:06:51.810 --> 01:06:52.900 on innovation. 01:06:52.900 --> 01:06:54.070 That's a cost. 01:06:54.070 --> 01:06:57.300 Would you cut costs there or would you 01:06:57.300 --> 01:07:01.480 cut costs to focus on manufacturing cost? 01:07:01.480 --> 01:07:05.700 AUDIENCE: I mean, I guess I was focusing 01:07:05.700 --> 01:07:07.910 on manufacturing costs. 01:07:07.910 --> 01:07:08.570 I mean, those-- 01:07:08.570 --> 01:07:10.320 RICHARD SCHMALENSEE: Daycare center stays, 01:07:10.320 --> 01:07:14.160 but we're going to really try to get these things built 01:07:14.160 --> 01:07:15.075 more cheaply. 01:07:15.075 --> 01:07:15.700 AUDIENCE: Yeah. 01:07:15.700 --> 01:07:16.700 RICHARD SCHMALENSEE: OK. 01:07:16.700 --> 01:07:22.560 And then would you use that to cut prices? 01:07:22.560 --> 01:07:24.570 AUDIENCE: You could. 01:07:24.570 --> 01:07:28.515 I mean, if cutting prices reflects lower quality-- 01:07:28.515 --> 01:07:30.140 RICHARD SCHMALENSEE: That would be bad. 01:07:30.140 --> 01:07:30.765 AUDIENCE: Yeah. 01:07:30.765 --> 01:07:34.380 But you could also stress that you have 01:07:34.380 --> 01:07:37.767 better quality machines or-- 01:07:37.767 --> 01:07:39.100 RICHARD SCHMALENSEE: Jacqueline. 01:07:39.100 --> 01:07:40.860 AUDIENCE: I was going to say I agree with that, that you could 01:07:40.860 --> 01:07:43.320 use that to cut prices, but at the same time still 01:07:43.320 --> 01:07:46.360 highlight the quality of the product and that advantage. 01:07:46.360 --> 01:07:49.520 You could do both strategies. 01:07:49.520 --> 01:07:51.200 RICHARD SCHMALENSEE: OK. 01:07:51.200 --> 01:07:53.840 Anybody has-- yeah. 01:07:53.840 --> 01:07:56.830 AUDIENCE: I'd say increased services at point of purchase, 01:07:56.830 --> 01:08:01.520 so they offer free installation or servicing of full Husky 01:08:01.520 --> 01:08:04.415 machines or whenever you buy new ones, or something like that, 01:08:04.415 --> 01:08:06.290 to focus when they're going to buy a machine, 01:08:06.290 --> 01:08:07.832 they're going to have it for a while. 01:08:07.832 --> 01:08:09.530 So focus right on that point. 01:08:09.530 --> 01:08:12.140 RICHARD SCHMALENSEE: So that's costing me money. 01:08:12.140 --> 01:08:13.910 So how am I going to get it back? 01:08:13.910 --> 01:08:15.606 Or am I not? 01:08:15.606 --> 01:08:17.532 AUDIENCE: Customer loyalty-- you're 01:08:17.532 --> 01:08:18.740 going to sell those machines. 01:08:18.740 --> 01:08:20.990 I guess you have to weigh that kind of back and forth, 01:08:20.990 --> 01:08:22.115 but hopefully end positive. 01:08:22.115 --> 01:08:24.282 RICHARD SCHMALENSEE: Yeah, I mean, one approach here 01:08:24.282 --> 01:08:25.490 is to say, "Game over." 01:08:25.490 --> 01:08:28.470 I made a lot of money before people came into my segment, 01:08:28.470 --> 01:08:31.170 and I'm not going to make that kind of money again. 01:08:31.170 --> 01:08:33.410 So what I want to make sure is that I 01:08:33.410 --> 01:08:36.590 maintain a position through high service and whatever, 01:08:36.590 --> 01:08:37.830 and don't get swamped. 01:08:37.830 --> 01:08:40.850 I kind of niche myself even a little more. 01:08:40.850 --> 01:08:41.950 Charlotte. 01:08:41.950 --> 01:08:44.120 AUDIENCE: Well, I think that they 01:08:44.120 --> 01:08:46.680 are a very different company than their competitors. 01:08:46.680 --> 01:08:49.619 They're focusing on this kind of assembly line manufacturing 01:08:49.619 --> 01:08:51.500 that allows them to specialize products 01:08:51.500 --> 01:08:52.862 for what their consumer wants. 01:08:52.862 --> 01:08:55.279 So they can focus on that, and even take that a little bit 01:08:55.279 --> 01:08:55.779 further. 01:08:55.779 --> 01:08:58.580 And maybe if there's a huge price difference 01:08:58.580 --> 01:09:00.680 than what their competitors are now charging 01:09:00.680 --> 01:09:02.870 to modify their machines. 01:09:02.870 --> 01:09:04.463 And what they have been charging, 01:09:04.463 --> 01:09:06.380 they could cut price a little so they're still 01:09:06.380 --> 01:09:13.407 a high quality company, higher, more luxury, but not as much. 01:09:13.407 --> 01:09:15.740 Because they were charging really, really high premiums, 01:09:15.740 --> 01:09:16.240 too. 01:09:16.240 --> 01:09:17.779 They could just change that. 01:09:17.779 --> 01:09:18.870 RICHARD SCHMALENSEE: They could come down a bit. 01:09:18.870 --> 01:09:20.490 I mean, although the premiums seem 01:09:20.490 --> 01:09:23.007 to be justified based on that analysis. 01:09:23.007 --> 01:09:23.840 Everybody over here? 01:09:23.840 --> 01:09:25.010 Pedro. 01:09:25.010 --> 01:09:26.479 I tend to look left. 01:09:26.479 --> 01:09:29.696 So you need to wave your hand. 01:09:29.696 --> 01:09:31.279 AUDIENCE: At the beginning, I was also 01:09:31.279 --> 01:09:34.279 thinking of the manufacturing costs of the machines. 01:09:34.279 --> 01:09:38.790 Are those more energy efficient? 01:09:38.790 --> 01:09:41.084 So that's [INAUDIBLE] production costs. 01:09:41.084 --> 01:09:42.359 That's what I was thinking. 01:09:42.359 --> 01:09:45.040 But then I was also thinking, just thought 01:09:45.040 --> 01:09:47.200 of maybe expanding the market a little bit. 01:09:49.779 --> 01:09:57.220 Because the other companies produce more types of plastics. 01:09:57.220 --> 01:10:00.220 RICHARD SCHMALENSEE: So maybe go into some other segments, OK. 01:10:00.220 --> 01:10:03.880 Let me give you a few thoughts. 01:10:03.880 --> 01:10:06.850 They have a lot of choices here. 01:10:06.850 --> 01:10:10.360 And it's interesting. 01:10:10.360 --> 01:10:13.120 Looking at this whole menu, one of the things I must 01:10:13.120 --> 01:10:16.730 say that struck me is before 1995, 01:10:16.730 --> 01:10:21.580 this is a great example of how all the pieces fit together. 01:10:21.580 --> 01:10:23.230 They focused on a segment. 01:10:23.230 --> 01:10:25.090 They figured out that that segment 01:10:25.090 --> 01:10:26.860 cares about performance. 01:10:26.860 --> 01:10:29.800 They're all about performance and technical excellence. 01:10:29.800 --> 01:10:32.620 They got a culture that fits with that. 01:10:32.620 --> 01:10:34.360 All the pieces fit together. 01:10:34.360 --> 01:10:35.800 It's IKEA. 01:10:35.800 --> 01:10:39.550 It's Southwest Airlines. 01:10:39.550 --> 01:10:43.490 And comes now this difficult time. 01:10:43.490 --> 01:10:45.800 Can you make the things fit together? 01:10:45.800 --> 01:10:48.280 So a couple of choices-- 01:10:48.280 --> 01:10:51.400 their basic options-- I mean, you can try to can try 01:10:51.400 --> 01:10:52.870 to increase-- 01:10:52.870 --> 01:10:54.970 Netstal is one of the entrants, you will recall. 01:10:54.970 --> 01:10:58.870 You can try to increase willingness to pay. 01:10:58.870 --> 01:11:02.740 You can think about more service, 01:11:02.740 --> 01:11:06.580 more R&D. The question Schad has to ask himself, 01:11:06.580 --> 01:11:11.020 one of the questions, is, is there room for that? 01:11:11.020 --> 01:11:16.220 Differentiation makes you money if it's cost effective. 01:11:16.220 --> 01:11:18.730 So the question is, how much more service-- 01:11:18.730 --> 01:11:21.010 what would you get from increased service? 01:11:21.010 --> 01:11:25.000 The question of thinking about who your customers are-- 01:11:25.000 --> 01:11:26.230 are they repeat? 01:11:26.230 --> 01:11:27.850 Is this the same people expanding? 01:11:27.850 --> 01:11:29.440 Is it new people? 01:11:29.440 --> 01:11:32.080 What's the return to that? 01:11:32.080 --> 01:11:34.240 You could improve the cost position. 01:11:34.240 --> 01:11:36.040 Remember these two basic approaches-- 01:11:36.040 --> 01:11:38.080 you can differentiate, you can lower cost. 01:11:41.440 --> 01:11:44.590 Can you cut cost and still deliver? 01:11:44.590 --> 01:11:47.170 If you cut the perks, cut the sales force, 01:11:47.170 --> 01:11:48.670 will you affect the culture? 01:11:48.670 --> 01:11:52.870 Can you continue to deliver if you do an aggressive cost cut? 01:11:52.870 --> 01:11:53.997 And you can cut margins. 01:11:53.997 --> 01:11:55.330 They've got pretty good margins. 01:11:55.330 --> 01:11:56.663 They've got room to cut margins. 01:12:00.490 --> 01:12:05.950 But to become the low-cost producer-- probably not. 01:12:05.950 --> 01:12:08.050 They could go after other segments. 01:12:08.050 --> 01:12:09.790 They only serve part of the business. 01:12:09.790 --> 01:12:12.430 They could grow by going to other segments. 01:12:12.430 --> 01:12:14.200 But given that they're a high-cost company 01:12:14.200 --> 01:12:16.990 and have a particular culture, the question you'd have to ask 01:12:16.990 --> 01:12:19.060 is, does that fit? 01:12:19.060 --> 01:12:22.320 Can we do that? 01:12:22.320 --> 01:12:28.390 And then you'd like the whole package to fit. 01:12:28.390 --> 01:12:31.510 And at this point, how old was Schad? 01:12:31.510 --> 01:12:35.080 Schad was 67 in 1995. 01:12:35.080 --> 01:12:38.710 So someone in that age bracket, let me just say-- 01:12:38.710 --> 01:12:42.460 he obviously has to think about what am I handing off? 01:12:42.460 --> 01:12:44.843 Am I going to create something that's going to go on? 01:12:44.843 --> 01:12:46.510 Because he's not going to be leading it. 01:12:46.510 --> 01:12:49.600 Well, one assumes he's not going to be an active participant 01:12:49.600 --> 01:12:52.130 for another 20 years. 01:12:52.130 --> 01:12:59.320 So what he did was actually quite drastic. 01:13:02.347 --> 01:13:04.180 I don't know whether this is right or wrong, 01:13:04.180 --> 01:13:05.740 but this is what he did. 01:13:05.740 --> 01:13:08.470 They went into other niches. 01:13:08.470 --> 01:13:09.730 They moved out. 01:13:09.730 --> 01:13:12.040 They increased their manufacturing capacity 01:13:12.040 --> 01:13:12.850 substantially. 01:13:12.850 --> 01:13:15.160 They thought they were too small for scale, 01:13:15.160 --> 01:13:17.050 so they added capacity. 01:13:17.050 --> 01:13:22.760 They cut prices dramatically in response to low-price entrants. 01:13:22.760 --> 01:13:24.380 Probably isn't going to keep them out. 01:13:24.380 --> 01:13:27.260 They worked to cut costs. 01:13:27.260 --> 01:13:29.720 Cutting prices, it was argued, was a way 01:13:29.720 --> 01:13:34.590 to put pressure on costs and hope you can keep the culture. 01:13:34.590 --> 01:13:36.480 You basically say to your people, look, 01:13:36.480 --> 01:13:38.400 we're getting killed on price. 01:13:38.400 --> 01:13:40.482 We've got a match, and the only way 01:13:40.482 --> 01:13:42.690 we're going to make any money is if we can find a way 01:13:42.690 --> 01:13:44.070 to get the cost down. 01:13:44.070 --> 01:13:48.540 But they didn't decrease R&D. They didn't decrease 01:13:48.540 --> 01:13:50.760 the manufacturing center. 01:13:50.760 --> 01:13:52.680 They didn't decrease the sales force. 01:13:52.680 --> 01:13:57.300 They began to build more in-house. 01:13:57.300 --> 01:14:03.960 And they had an IPO, sold off the company in 1968. 01:14:03.960 --> 01:14:05.850 How well do you think this package worked? 01:14:09.350 --> 01:14:11.455 Say in words-- not so well. 01:14:11.455 --> 01:14:12.080 AUDIENCE: Yeah. 01:14:12.080 --> 01:14:14.150 I mean, also in hindsight, I would 01:14:14.150 --> 01:14:18.970 argue that if you'd have an organization in the [INAUDIBLE] 01:14:18.970 --> 01:14:20.000 as well. 01:14:20.000 --> 01:14:22.000 So I would argue that the low-cost manufacturers 01:14:22.000 --> 01:14:26.560 in the US get undercut by Chinese manufacturers. 01:14:26.560 --> 01:14:28.610 And the best way to stay competitive 01:14:28.610 --> 01:14:31.607 was to stay high cost, high quality. 01:14:31.607 --> 01:14:32.690 RICHARD SCHMALENSEE: Yeah. 01:14:32.690 --> 01:14:35.420 I mean, it's a curious mixture, isn't it? 01:14:35.420 --> 01:14:39.860 Because the company was built for high cost, high quality. 01:14:39.860 --> 01:14:45.140 And they tried to position themselves 01:14:45.140 --> 01:14:51.740 as the high cost, high quality firm across the market in all 01:14:51.740 --> 01:14:55.220 of these niches, even though in a bunch of the niches, 01:14:55.220 --> 01:14:58.770 quality wasn't that important. 01:14:58.770 --> 01:15:04.920 So I've seen numbers through 1999, 01:15:04.920 --> 01:15:07.500 and they continue to grow because the business grew. 01:15:07.500 --> 01:15:10.680 Their profitability was not terrific. 01:15:10.680 --> 01:15:14.190 It was pretty erratic because they're changing the company 01:15:14.190 --> 01:15:16.180 rather dramatically. 01:15:16.180 --> 01:15:17.940 And you can't get any more numbers 01:15:17.940 --> 01:15:20.560 because they went private last year. 01:15:20.560 --> 01:15:23.760 So their website now is just an advertisement 01:15:23.760 --> 01:15:24.693 for their technology. 01:15:24.693 --> 01:15:26.610 There are no numbers available because they're 01:15:26.610 --> 01:15:29.350 a privately held company. 01:15:29.350 --> 01:15:32.370 They're still in Bolton, Ontario. 01:15:32.370 --> 01:15:36.320 Questions, comments, reactions, thoughts? 01:15:36.320 --> 01:15:37.040 Yeah. 01:15:37.040 --> 01:15:39.560 AUDIENCE: Did they go private by some sort of buyout 01:15:39.560 --> 01:15:42.552 because of poor performance? 01:15:42.552 --> 01:15:44.510 RICHARD SCHMALENSEE: Their website doesn't say, 01:15:44.510 --> 01:15:48.080 we went private because we were performing poorly. 01:15:48.080 --> 01:15:50.720 The website just says, such and such a private equity firm 01:15:50.720 --> 01:15:52.550 bought them. 01:15:52.550 --> 01:15:56.000 I don't think that's implausible, but I don't know. 01:15:56.000 --> 01:15:58.790 It's not implausible that this strategy-- 01:15:58.790 --> 01:16:03.590 that a private equity firm said this strategy is a loser, 01:16:03.590 --> 01:16:05.420 and we can make this firm more profitable 01:16:05.420 --> 01:16:06.540 by changing strategy. 01:16:06.540 --> 01:16:08.180 But I don't know that. 01:16:08.180 --> 01:16:10.840 OK, see you all next time.