WEBVTT 1 00:00:02.520 --> 00:00:05.583 Hello, and we welcome to Place, Part 3. 2 00:00:07.860 --> 00:00:10.170 So now we're gonna talk about place 3 00:00:10.170 --> 00:00:14.280 in terms of where do you get the inputs, the materials, 4 00:00:14.280 --> 00:00:19.233 the supplies that you need to run your business. 5 00:00:21.750 --> 00:00:26.747 But, basically, every business needs some kinds of inputs. 6 00:00:29.692 --> 00:00:33.173 You know, farmers need seeds and irrigation, 7 00:00:35.460 --> 00:00:38.343 restaurants need food and plates, 8 00:00:39.570 --> 00:00:43.420 a consultant probably needs a computer 9 00:00:45.720 --> 00:00:46.680 and things like that. 10 00:00:46.680 --> 00:00:49.387 So where do you get them? 11 00:00:53.070 --> 00:00:58.070 And the Nobel Laureate economist, Ronald Coase, 12 00:00:59.850 --> 00:01:02.220 talked about, he wrote a very influential paper 13 00:01:02.220 --> 00:01:05.760 called "The Theory of the Firm," 14 00:01:05.760 --> 00:01:08.970 and he argued that the firm is defined 15 00:01:08.970 --> 00:01:12.570 by those things that they make. 16 00:01:12.570 --> 00:01:15.720 And thinking about 17 00:01:15.720 --> 00:01:20.280 where does a firm get the inputs that they need? 18 00:01:20.280 --> 00:01:23.700 In some cases, they buy them. 19 00:01:23.700 --> 00:01:27.930 So a restaurant would probably choose 20 00:01:27.930 --> 00:01:31.140 to buy plates and forks. 21 00:01:31.140 --> 00:01:32.610 It wouldn't make them for them 22 00:01:32.610 --> 00:01:35.790 to have their own plate or fork factory. 23 00:01:35.790 --> 00:01:40.740 But the restaurant, also, if they serve marinara, 24 00:01:40.740 --> 00:01:44.220 they would very likely sort of make it from scratch, 25 00:01:44.220 --> 00:01:47.730 that while they would buy the tomatoes 26 00:01:47.730 --> 00:01:52.730 and the spices and such, they would make that themselves. 27 00:01:54.300 --> 00:01:58.023 And his argument is, 28 00:02:00.477 --> 00:02:05.313 the driver of this is based on transaction costs, 29 00:02:08.508 --> 00:02:10.020 and there's three types. 30 00:02:10.020 --> 00:02:14.040 First is who has this good that I want? 31 00:02:14.040 --> 00:02:17.820 Second is bargaining, what's a good price for this? 32 00:02:17.820 --> 00:02:20.160 And third is enforcement. 33 00:02:20.160 --> 00:02:24.930 How do I know I'm getting what I want? 34 00:02:24.930 --> 00:02:28.260 So there are three main options that he talks about. 35 00:02:28.260 --> 00:02:31.170 There's spot markets, which is buying it. 36 00:02:31.170 --> 00:02:34.200 There's vertical integration, 37 00:02:34.200 --> 00:02:36.750 where you have to make it yourself, 38 00:02:36.750 --> 00:02:39.544 that you sort of go into the business, 39 00:02:39.544 --> 00:02:44.544 the restaurant is sort of also in the marinara business. 40 00:02:46.710 --> 00:02:49.890 And then there's a lot of sort of in-between space 41 00:02:49.890 --> 00:02:52.090 where there are strategic 42 00:02:57.390 --> 00:02:58.980 partnerships. 43 00:02:58.980 --> 00:03:02.640 So a good example of this is milk. 44 00:03:02.640 --> 00:03:07.640 So if you just need some milk to put into, 45 00:03:10.350 --> 00:03:13.920 so you're a restaurant and you just need milk 46 00:03:13.920 --> 00:03:17.970 to sort of have on the table for coffee and tea, 47 00:03:17.970 --> 00:03:21.390 it doesn't make sense for you to be a dairy farm, 48 00:03:21.390 --> 00:03:23.520 that you're just gonna buy it. 49 00:03:23.520 --> 00:03:28.290 And this has very low transaction costs, 50 00:03:28.290 --> 00:03:33.000 that all those gallons of milk are basically the same. 51 00:03:33.000 --> 00:03:35.190 There's a very well-established price. 52 00:03:35.190 --> 00:03:38.640 And since there's a lot of information there, 53 00:03:38.640 --> 00:03:43.640 since it's way at the commodity end of the scale, 54 00:03:43.920 --> 00:03:46.893 you basically always get what you want. 55 00:03:47.820 --> 00:03:50.520 But if you're an artisanal cheese maker 56 00:03:50.520 --> 00:03:54.270 and you need milk that has very, very specific 57 00:03:54.270 --> 00:03:59.270 and rare qualities, that gallon of milk 58 00:03:59.550 --> 00:04:02.760 that you can also buy at the gas station 59 00:04:02.760 --> 00:04:06.810 doesn't work for you. 60 00:04:06.810 --> 00:04:11.800 And finding somebody who can produce milk 61 00:04:12.660 --> 00:04:17.490 to those specifications, to negotiate a price, 62 00:04:17.490 --> 00:04:21.330 and to make sure that, every single time, 63 00:04:21.330 --> 00:04:24.600 that that milk has those attributes, 64 00:04:24.600 --> 00:04:27.690 that has very high transaction costs. 65 00:04:27.690 --> 00:04:32.690 That's a very highly differentiated product, 66 00:04:32.850 --> 00:04:35.970 and in which case, there may not be anyone 67 00:04:35.970 --> 00:04:39.720 that you can find that can make it exactly like you want, 68 00:04:39.720 --> 00:04:43.500 and you may have to also be a dairy farm. 69 00:04:43.500 --> 00:04:46.710 So we see that the really, really high-end, 70 00:04:46.710 --> 00:04:50.193 sort of most artisanal cheese makers, 71 00:04:51.210 --> 00:04:53.250 that they're so-called single herd, 72 00:04:53.250 --> 00:04:57.540 that they produce the milk themselves, 73 00:04:57.540 --> 00:05:00.780 so it is exactly like they want it to be. 74 00:05:00.780 --> 00:05:03.630 So they sort of vertically integrate 75 00:05:03.630 --> 00:05:06.600 not only the cheese-making business, 76 00:05:06.600 --> 00:05:08.853 but the dairy-farming business. 77 00:05:09.690 --> 00:05:13.530 And then in between are these strategic partnerships, 78 00:05:13.530 --> 00:05:15.330 where maybe they can, you know, 79 00:05:15.330 --> 00:05:18.030 certainly, they can't just go 80 00:05:18.030 --> 00:05:22.020 to the gas station or supermarket. 81 00:05:22.020 --> 00:05:23.940 They may not wanna make it themselves, 82 00:05:23.940 --> 00:05:26.640 but maybe they can partner with a farm 83 00:05:26.640 --> 00:05:31.640 who can make it very much like they will want it to be. 84 00:05:32.100 --> 00:05:35.010 And there's a lot of sort of in-between space there, 85 00:05:35.010 --> 00:05:39.420 in these strategic partnerships. 86 00:05:39.420 --> 00:05:41.310 So again, you're going to, 87 00:05:41.310 --> 00:05:43.420 so a commodity 88 00:05:44.490 --> 00:05:47.490 has very low transaction costs. 89 00:05:47.490 --> 00:05:50.850 You're much more likely to buy that. 90 00:05:50.850 --> 00:05:55.290 A highly specialized, highly differentiated input 91 00:05:55.290 --> 00:05:58.230 has very high transaction cost. 92 00:05:58.230 --> 00:06:00.690 You may have to make it yourself, 93 00:06:00.690 --> 00:06:03.123 and then there's a lot of in-between space. 94 00:06:05.040 --> 00:06:08.160 So again, spot markets are buy. 95 00:06:08.160 --> 00:06:13.160 These are best when these goods are routine in quality, 96 00:06:13.590 --> 00:06:16.140 there's many vendors, and you just sort of, 97 00:06:16.140 --> 00:06:20.340 you want the rest of the world lining up at your door, 98 00:06:20.340 --> 00:06:22.860 sort of competing against each other 99 00:06:22.860 --> 00:06:27.860 to get you the best product for the best price, 100 00:06:28.410 --> 00:06:32.313 and here, price is the primary driver. 101 00:06:35.880 --> 00:06:39.630 Vertical integration or hierarchy is 102 00:06:39.630 --> 00:06:41.400 that you have to make it yourself, 103 00:06:41.400 --> 00:06:46.400 that you want very close control over this. 104 00:06:47.040 --> 00:06:52.040 Very few, if any, can do it exactly like you want them to, 105 00:06:55.410 --> 00:06:59.100 but then also, if there's specific infrastructure 106 00:06:59.100 --> 00:07:04.100 that you need, it ensures that you will use it 107 00:07:04.320 --> 00:07:07.353 over and over again and get good value out of it. 108 00:07:09.390 --> 00:07:14.390 And again, this in between is strategic partnership, 109 00:07:15.210 --> 00:07:18.180 and they're hopefully win-win. 110 00:07:18.180 --> 00:07:20.050 So that's when 111 00:07:20.970 --> 00:07:25.440 to do the vertical integration 112 00:07:25.440 --> 00:07:28.230 sort of takes you away of what you do best, 113 00:07:28.230 --> 00:07:31.620 and these arm-length ones sort of can't give you 114 00:07:31.620 --> 00:07:33.600 what you need, and they should be marked 115 00:07:33.600 --> 00:07:37.080 by both fair sharing of risk and reward 116 00:07:37.080 --> 00:07:40.053 and by product differentiation. 117 00:07:43.320 --> 00:07:47.770 And so you can think about, when you are B2C, 118 00:07:48.720 --> 00:07:51.240 when you're selling directly to consumers, 119 00:07:51.240 --> 00:07:54.750 you have to make your own marketing, 120 00:07:54.750 --> 00:07:59.220 so this has the advantage of the marketing is exactly 121 00:07:59.220 --> 00:08:00.900 how you want it to be. 122 00:08:00.900 --> 00:08:04.230 You design it, it's exactly like you want, 123 00:08:04.230 --> 00:08:08.280 everything is being presented like you think is best, 124 00:08:08.280 --> 00:08:11.280 but there's a lot of bother to it. 125 00:08:11.280 --> 00:08:15.360 B2B is, you're sort of buying the marketing services 126 00:08:15.360 --> 00:08:16.770 of somebody else. 127 00:08:16.770 --> 00:08:21.420 So the farmer that sells to a distributor, 128 00:08:21.420 --> 00:08:25.020 they don't have to do any more marketing, 129 00:08:25.020 --> 00:08:28.470 and in a sense, they're buying the marketing services 130 00:08:28.470 --> 00:08:31.470 from the distributor, 131 00:08:31.470 --> 00:08:35.373 and maybe the retailer, the restaurant, et cetera. 132 00:08:38.250 --> 00:08:42.720 So many of you might have a service-based business 133 00:08:42.720 --> 00:08:47.087 for your idea, or may wish to in the future. 134 00:08:49.050 --> 00:08:52.170 Well, one thing to think about is 135 00:08:52.170 --> 00:08:53.880 do you need a storefront? 136 00:08:53.880 --> 00:08:57.870 Do you need a place? Do you need an office? 137 00:08:57.870 --> 00:09:02.820 And what attributes must it have, 138 00:09:02.820 --> 00:09:06.660 and what trade offs might you face in that location? 139 00:09:06.660 --> 00:09:10.260 Do you need foot traffic, which might be high rent, 140 00:09:10.260 --> 00:09:13.860 or can you work just from home, 141 00:09:13.860 --> 00:09:16.260 which is sort of much less rent. 142 00:10:23.211 --> 00:10:28.211 So more sort of key differences of a service, 143 00:10:29.010 --> 00:10:33.060 that it can't, usually, be seen, held or touched, 144 00:10:33.060 --> 00:10:38.040 that each time you do it, it's a unique thing, 145 00:10:38.040 --> 00:10:41.640 that it can't be consumed later, 146 00:10:41.640 --> 00:10:44.880 and sort of you are the product, 147 00:10:44.880 --> 00:10:48.753 and it's delivered and consumed at the same time. 148 00:10:50.160 --> 00:10:52.650 So it's really important 149 00:10:52.650 --> 00:10:57.390 that you develop relationships of trust, 150 00:10:57.390 --> 00:11:00.750 that there's no better recommendation 151 00:11:00.750 --> 00:11:04.230 than someone that uses your service 152 00:11:04.230 --> 00:11:07.050 and loves it and speaks well. 153 00:11:07.050 --> 00:11:09.120 It's much more efficient to keep old, 154 00:11:09.120 --> 00:11:11.760 but you do wanna still keep new. 155 00:11:11.760 --> 00:11:14.520 And with these relationships, 156 00:11:14.520 --> 00:11:17.610 you really learn what goes well and what doesn't go well, 157 00:11:17.610 --> 00:11:21.423 so you can maximize the value of what you do. 158 00:11:23.670 --> 00:11:25.290 So here's a good video 159 00:11:25.290 --> 00:11:29.880 which shows the example 160 00:11:29.880 --> 00:11:32.190 of a farmer that I've worked with, 161 00:11:32.190 --> 00:11:35.343 and what does he make, and what does he buy and why? 162 00:11:39.570 --> 00:11:41.580 So we've talked about both 163 00:11:41.580 --> 00:11:46.580 how does the good get from you to the consumer? 164 00:11:47.340 --> 00:11:48.690 How do we deal? 165 00:11:48.690 --> 00:11:50.460 What do we make and what do we buy? 166 00:11:50.460 --> 00:11:52.410 How do we get the input that we need? 167 00:11:52.410 --> 00:11:55.710 And the role of place in a service. 168 00:11:55.710 --> 00:12:00.710 So that is the end of the videos on place, thank you.