-: Hello, and we welcome to Place, Part 3.
So now we're gonna talk about place
in terms of where do you get the inputs, the materials,
the supplies that you need to run your business.
But, basically, every business needs some kinds of inputs.
You know, farmers need seeds and irrigation,
restaurants need food and plates,
a consultant probably needs a computer
and things like that.
So where do you get them?
And the Nobel Laureate economist, Ronald Coase,
talked about, he wrote a very influential paper
called "The Theory of the Firm,"
and he argued that the firm is defined
by those things that they make.
And thinking about
where does a firm get the inputs that they need?
In some cases, they buy them.
So a restaurant would probably choose
to buy plates and forks.
It wouldn't make them for them
to have their own plate or fork factory.
But the restaurant, also, if they serve marinara,
they would very likely sort of make it from scratch,
that while they would buy the tomatoes
and the spices and such, they would make that themselves.
And his argument is,
the driver of this is based on transaction costs,
and there's three types.
First is who has this good that I want?
Second is bargaining, what's a good price for this?
And third is enforcement.
How do I know I'm getting what I want?
So there are three main options that he talks about.
There's spot markets, which is buying it.
There's vertical integration,
where you have to make it yourself,
that you sort of go into the business,
the restaurant is sort of also in the marinara business.
And then there's a lot of sort of in-between space
where there are strategic
partnerships.
So a good example of this is milk.
So if you just need some milk to put into,
so you're a restaurant and you just need milk
to sort of have on the table for coffee and tea,
it doesn't make sense for you to be a dairy farm,
that you're just gonna buy it.
And this has very low transaction costs,
that all those gallons of milk are basically the same.
There's a very well-established price.
And since there's a lot of information there,
since it's way at the commodity end of the scale,
you basically always get what you want.
But if you're an artisanal cheese maker
and you need milk that has very, very specific
and rare qualities, that gallon of milk
that you can also buy at the gas station
doesn't work for you.
And finding somebody who can produce milk
to those specifications, to negotiate a price,
and to make sure that, every single time,
that that milk has those attributes,
that has very high transaction costs.
That's a very highly differentiated product,
and in which case, there may not be anyone
that you can find that can make it exactly like you want,
and you may have to also be a dairy farm.
So we see that the really, really high-end,
sort of most artisanal cheese makers,
that they're so-called single herd,
that they produce the milk themselves,
so it is exactly like they want it to be.
So they sort of vertically integrate
not only the cheese-making business,
but the dairy-farming business.
And then in between are these strategic partnerships,
where maybe they can, you know,
certainly, they can't just go
to the gas station or supermarket.
They may not wanna make it themselves,
but maybe they can partner with a farm
who can make it very much like they will want it to be.
And there's a lot of sort of in-between space there,
in these strategic partnerships.
So again, you're going to,
so a commodity
has very low transaction costs.
You're much more likely to buy that.
A highly specialized, highly differentiated input
has very high transaction cost.
You may have to make it yourself,
and then there's a lot of in-between space.
So again, spot markets are buy.
These are best when these goods are routine in quality,
there's many vendors, and you just sort of,
you want the rest of the world lining up at your door,
sort of competing against each other
to get you the best product for the best price,
and here, price is the primary driver.
Vertical integration or hierarchy is
that you have to make it yourself,
that you want very close control over this.
Very few, if any, can do it exactly like you want them to,
but then also, if there's specific infrastructure
that you need, it ensures that you will use it
over and over again and get good value out of it.
And again, this in between is strategic partnership,
and they're hopefully win-win.
So that's when
to do the vertical integration
sort of takes you away of what you do best,
and these arm-length ones sort of can't give you
what you need, and they should be marked
by both fair sharing of risk and reward
and by product differentiation.
And so you can think about, when you are B2C,
when you're selling directly to consumers,
you have to make your own marketing,
so this has the advantage of the marketing is exactly
how you want it to be.
You design it, it's exactly like you want,
everything is being presented like you think is best,
but there's a lot of bother to it.
B2B is, you're sort of buying the marketing services
of somebody else.
So the farmer that sells to a distributor,
they don't have to do any more marketing,
and in a sense, they're buying the marketing services
from the distributor,
and maybe the retailer, the restaurant, et cetera.
So many of you might have a service-based business
for your idea, or may wish to in the future.
Well, one thing to think about is
do you need a storefront?
Do you need a place? Do you need an office?
And what attributes must it have,
and what trade offs might you face in that location?
Do you need foot traffic, which might be high rent,
or can you work just from home,
which is sort of much less rent.
So more sort of key differences of a service,
that it can't, usually, be seen, held or touched,
that each time you do it, it's a unique thing,
that it can't be consumed later,
and sort of you are the product,
and it's delivered and consumed at the same time.
So it's really important
that you develop relationships of trust,
that there's no better recommendation
than someone that uses your service
and loves it and speaks well.
It's much more efficient to keep old,
but you do wanna still keep new.
And with these relationships,
you really learn what goes well and what doesn't go well,
so you can maximize the value of what you do.
So here's a good video
which shows the example
of a farmer that I've worked with,
and what does he make, and what does he buy and why?
So we've talked about both
how does the good get from you to the consumer?
How do we deal?
What do we make and what do we buy?
How do we get the input that we need?
And the role of place in a service.
So that is the end of the videos on place, thank you.