1 00:00:02,410 --> 00:00:03,670 - [Instructor] This is part three 2 00:00:03,670 --> 00:00:06,373 of the video lecture on place. 3 00:00:12,390 --> 00:00:17,020 So now we're going to talk about how do you get the inputs 4 00:00:17,020 --> 00:00:18,010 that you need? 5 00:00:18,010 --> 00:00:21,220 How do you get the materials, 6 00:00:21,220 --> 00:00:25,593 and the services that your business needs? 7 00:00:26,520 --> 00:00:31,520 So all businesses I would say need inputs of some kind. 8 00:00:33,070 --> 00:00:36,180 They buy things from somewhere 9 00:00:36,180 --> 00:00:39,330 or in some cases, they make it themselves. 10 00:00:39,330 --> 00:00:43,600 And they do some sort of transformation of it, 11 00:00:43,600 --> 00:00:48,600 and then they sell this transformed product. 12 00:00:52,320 --> 00:00:57,210 So this photo that you see here 13 00:00:57,210 --> 00:01:00,680 is a man named Ronald Coase 14 00:01:00,680 --> 00:01:05,630 who was a Nobel Prize-winning economist. 15 00:01:05,630 --> 00:01:09,080 And one of his landmark work 16 00:01:09,080 --> 00:01:12,390 is on transaction costs. 17 00:01:12,390 --> 00:01:14,900 And we'll talk a little bit about 18 00:01:17,640 --> 00:01:21,570 transaction costs, and specifically, 19 00:01:21,570 --> 00:01:26,570 he applied it to what he called the theory of the firm. 20 00:01:27,940 --> 00:01:31,860 And the make or buy decision. 21 00:01:31,860 --> 00:01:36,300 So a firm needs some kind of input. 22 00:01:36,300 --> 00:01:40,950 So I am a professor say. 23 00:01:40,950 --> 00:01:44,583 There are certain inputs that I need. 24 00:01:45,460 --> 00:01:49,700 Do I make them myself or do I buy them? 25 00:01:49,700 --> 00:01:52,950 So an example is a laptop. 26 00:01:52,950 --> 00:01:56,430 Right now, I am talking to a laptop. 27 00:01:56,430 --> 00:01:58,340 It is recording. 28 00:01:58,340 --> 00:02:00,470 It really doesn't make sense 29 00:02:00,470 --> 00:02:05,470 for me to make my own laptop. 30 00:02:06,450 --> 00:02:09,860 I don't really know how to do it. 31 00:02:09,860 --> 00:02:11,700 There's a lot of 'em available. 32 00:02:11,700 --> 00:02:14,223 I can just buy it and use it. 33 00:02:15,070 --> 00:02:16,270 On the other hand, 34 00:02:16,270 --> 00:02:20,010 it doesn't make sense for me to pay someone 35 00:02:20,010 --> 00:02:22,600 to teach the class for me. 36 00:02:22,600 --> 00:02:25,500 That I feel like I do that well. 37 00:02:25,500 --> 00:02:27,950 It's something I enjoy. 38 00:02:27,950 --> 00:02:31,150 I don't wanna have to pay somebody to do it. 39 00:02:31,150 --> 00:02:36,150 I wanna keep my whole paycheck for myself. 40 00:02:37,060 --> 00:02:40,513 So the instruction part I make. 41 00:02:41,800 --> 00:02:46,800 And Coase argued that this is determined 42 00:02:47,810 --> 00:02:50,650 by transaction costs. 43 00:02:50,650 --> 00:02:55,170 And he talked about how this helps 44 00:02:55,170 --> 00:02:59,630 to determine that the make or buy decision 45 00:02:59,630 --> 00:03:03,260 is determined by transaction costs. 46 00:03:03,260 --> 00:03:06,790 And that the make or buy decision helps 47 00:03:06,790 --> 00:03:09,710 to outline the boundary of the firm. 48 00:03:09,710 --> 00:03:12,410 What do I do? What do I not do? 49 00:03:12,410 --> 00:03:15,700 So for me, the boundary of my firm 50 00:03:15,700 --> 00:03:20,363 is I deliver the material, 51 00:03:21,400 --> 00:03:25,090 I develop it and deliver it myself 52 00:03:25,090 --> 00:03:27,770 but I don't make computers. 53 00:03:27,770 --> 00:03:31,563 And hopefully this will make more sense as we move forward. 54 00:03:32,600 --> 00:03:37,600 So anyway, Coase talks about that there are three kinds 55 00:03:37,920 --> 00:03:40,400 of transaction costs. 56 00:03:40,400 --> 00:03:45,400 Transaction cost is the cost of doing business. 57 00:03:45,500 --> 00:03:50,497 The cost of sellers and buyers finding each other 58 00:03:53,574 --> 00:03:58,260 and reaching an agreement that works for both. 59 00:03:58,260 --> 00:04:00,240 So from the buyer standpoint, 60 00:04:00,240 --> 00:04:01,950 I have three types. 61 00:04:01,950 --> 00:04:03,770 First is search. 62 00:04:03,770 --> 00:04:06,180 So who has this thing? 63 00:04:06,180 --> 00:04:07,560 Who has it for sale? 64 00:04:07,560 --> 00:04:12,170 Who's out there that has the thing that I want? 65 00:04:12,170 --> 00:04:15,480 So in the case of a laptop, 66 00:04:15,480 --> 00:04:19,190 there's Apple, there's Dell, there's lots of 'em out there. 67 00:04:19,190 --> 00:04:22,410 Next is how much do I pay? 68 00:04:22,410 --> 00:04:27,410 So there's a clear market for 69 00:04:32,130 --> 00:04:32,990 laptops. 70 00:04:32,990 --> 00:04:35,637 I can go online, I can go to a store. 71 00:04:35,637 --> 00:04:38,923 It has a fairly well-established price. 72 00:04:39,830 --> 00:04:42,930 And finally, how do I ensure 73 00:04:42,930 --> 00:04:46,280 that what I want is what I am getting? 74 00:04:46,280 --> 00:04:47,683 So in this case, 75 00:04:50,780 --> 00:04:55,550 again, a laptop has fairly clear specifications 76 00:04:55,550 --> 00:05:00,550 and it should perform in ways that I hope it does. 77 00:05:02,690 --> 00:05:07,020 So in the case of me finding someone 78 00:05:07,020 --> 00:05:11,530 to deliver it, this is a much more unusual thing. 79 00:05:11,530 --> 00:05:15,310 So first, I would have to find somebody 80 00:05:15,310 --> 00:05:19,960 who has enough expertise. 81 00:05:19,960 --> 00:05:22,570 I would have to figure out 82 00:05:23,950 --> 00:05:26,820 how I would have to pay this person. 83 00:05:26,820 --> 00:05:29,930 And last, I would have to monitor him 84 00:05:29,930 --> 00:05:34,930 and make sure that he is delivering the material 85 00:05:36,200 --> 00:05:38,408 in a way that works 86 00:05:38,408 --> 00:05:40,530 and is effective, 87 00:05:40,530 --> 00:05:45,530 and that gives students the value 88 00:05:46,560 --> 00:05:48,093 that they deserve. 89 00:05:49,510 --> 00:05:54,070 So what I'm arguing here, and what Coase argued 90 00:05:54,070 --> 00:05:58,503 is the more differentiated a product is, 91 00:05:59,750 --> 00:06:02,480 the higher the transaction costs, 92 00:06:02,480 --> 00:06:05,850 and the more common it is, the lower. 93 00:06:05,850 --> 00:06:09,190 So let's think about a true commodity, 94 00:06:09,190 --> 00:06:13,210 such as that gallon of white milk 95 00:06:13,210 --> 00:06:16,930 with the red cap in the plastic jug. 96 00:06:16,930 --> 00:06:18,760 So search, who has it? 97 00:06:18,760 --> 00:06:20,320 Lots of stores have it. 98 00:06:20,320 --> 00:06:21,640 Grocery stores have it, 99 00:06:21,640 --> 00:06:25,100 gas stations have it, convenience stores has it. 100 00:06:25,100 --> 00:06:26,910 Broadly available. 101 00:06:26,910 --> 00:06:29,820 What do I pay? 102 00:06:29,820 --> 00:06:33,420 Well, there's a very well-established price. 103 00:06:33,420 --> 00:06:35,150 Going from store to store, 104 00:06:35,150 --> 00:06:37,780 the price for that gallon of milk 105 00:06:37,780 --> 00:06:41,120 is probably gonna be pretty close. 106 00:06:41,120 --> 00:06:45,040 And how do I know I'm getting it? 107 00:06:45,040 --> 00:06:48,690 Well, because it's so homogenous, 108 00:06:48,690 --> 00:06:50,880 it's a one-size-fits-all, 109 00:06:50,880 --> 00:06:55,350 basically every one is the same, 110 00:06:55,350 --> 00:06:58,300 that there's not a lot of information there, 111 00:06:58,300 --> 00:07:03,300 and if I want this gallon of white milk, 112 00:07:04,490 --> 00:07:07,170 really, they're all the same, 113 00:07:07,170 --> 00:07:11,800 and I really don't have to go to a lot of bother 114 00:07:11,800 --> 00:07:16,683 to make sure that it's exactly what I want. 115 00:07:17,660 --> 00:07:20,100 And the last point on this slide 116 00:07:20,100 --> 00:07:22,260 is that there are three options. 117 00:07:22,260 --> 00:07:25,150 Spot markets, vertical integration 118 00:07:25,150 --> 00:07:27,270 and strategic partnerships. 119 00:07:27,270 --> 00:07:29,287 And I am going to talk about each one. 120 00:07:33,090 --> 00:07:37,470 The first kind of market 121 00:07:37,470 --> 00:07:41,380 or the first option is spot markets. 122 00:07:41,380 --> 00:07:45,710 Spot markets are all the way at the buy end 123 00:07:45,710 --> 00:07:48,520 of the continuum. 124 00:07:48,520 --> 00:07:52,440 So this is best for inputs 125 00:07:52,440 --> 00:07:56,010 that are sort of at the commodity end, 126 00:07:56,010 --> 00:07:58,380 that are broadly available, 127 00:07:58,380 --> 00:08:00,880 they're routinely bought and sold. 128 00:08:00,880 --> 00:08:03,360 They tend to be very homogenous 129 00:08:03,360 --> 00:08:06,000 and routine in quality. 130 00:08:06,000 --> 00:08:09,900 There are many vendors. There are many options. 131 00:08:09,900 --> 00:08:14,583 And in many cases, the buyer should just select one 132 00:08:15,500 --> 00:08:16,900 that works for them. 133 00:08:16,900 --> 00:08:19,640 In many case, the lowest 134 00:08:21,760 --> 00:08:25,813 priced one or maybe the most convenient one. 135 00:08:26,650 --> 00:08:31,650 So again, if you are buying a gallon of milk 136 00:08:33,690 --> 00:08:36,130 that doesn't make sense for you 137 00:08:36,130 --> 00:08:38,060 to make the milk yourself, 138 00:08:38,060 --> 00:08:39,750 to have a dairy farm 139 00:08:39,750 --> 00:08:42,880 and to do all that work yourself, 140 00:08:42,880 --> 00:08:45,650 it makes much more sense to buy it. 141 00:08:45,650 --> 00:08:50,650 As a professor, it makes more sense for me to buy a laptop. 142 00:08:51,050 --> 00:08:53,410 I don't know how to make them. 143 00:08:53,410 --> 00:08:55,580 There are many of 'em available. 144 00:08:55,580 --> 00:08:59,580 I can go online, I could go to a store. 145 00:08:59,580 --> 00:09:03,793 And I just go and pick the one that's best for me. 146 00:09:04,820 --> 00:09:08,900 So inputs that are broadly available, 147 00:09:08,900 --> 00:09:11,870 that are routinely bought and sold, 148 00:09:11,870 --> 00:09:15,810 those are the ones that you would use a spot market 149 00:09:15,810 --> 00:09:17,290 and buy them. 150 00:09:17,290 --> 00:09:20,140 And these tend to be fairly arms length, 151 00:09:20,140 --> 00:09:23,040 and anonymous relationships. 152 00:09:23,040 --> 00:09:28,040 So I might go buy the milk, 153 00:09:28,521 --> 00:09:33,300 the gallon of milk from Hannaford's one day 154 00:09:33,300 --> 00:09:36,320 because I'm doing some grocery shopping. 155 00:09:36,320 --> 00:09:38,920 But it might be that I just need to, 156 00:09:38,920 --> 00:09:42,600 I'm already at the drug store 157 00:09:42,600 --> 00:09:45,200 to pick up a prescription, 158 00:09:45,200 --> 00:09:49,720 and I remember that I need milk too. 159 00:09:49,720 --> 00:09:54,720 So I really don't work with the same person all the time. 160 00:09:59,240 --> 00:10:02,550 I don't tell them how to make that milk. 161 00:10:02,550 --> 00:10:06,050 I don't know what farm that it comes from. 162 00:10:06,050 --> 00:10:08,250 There's just lots of it available. 163 00:10:08,250 --> 00:10:10,040 I just go and pick the one 164 00:10:10,040 --> 00:10:12,063 that works best for me. 165 00:10:13,440 --> 00:10:16,000 And I'm gonna say a bit more. 166 00:10:16,000 --> 00:10:20,025 I'm gonna give you a more concrete example 167 00:10:20,025 --> 00:10:24,233 for a specific business for each of these. 168 00:10:27,900 --> 00:10:31,860 At the other end is the make. 169 00:10:31,860 --> 00:10:36,500 So this is when something is highly specialized. 170 00:10:36,500 --> 00:10:38,040 It's one of a kind. 171 00:10:38,040 --> 00:10:42,840 I'm really fussy about what it has to look like. 172 00:10:42,840 --> 00:10:46,270 That it really has to be suited 173 00:10:46,270 --> 00:10:49,543 to my particular circumstances. 174 00:10:50,895 --> 00:10:55,010 And so since it is highly specialized, 175 00:10:55,010 --> 00:11:00,010 there's not going to be a whole lot of suppliers. 176 00:11:00,950 --> 00:11:05,950 So it might be that I only want milk 177 00:11:06,960 --> 00:11:11,660 that is organic, free range cows, 178 00:11:11,660 --> 00:11:16,303 fed a really special kind of hay. 179 00:11:17,300 --> 00:11:20,680 Whoever milks the cows has to sing 180 00:11:20,680 --> 00:11:22,490 to the cows. 181 00:11:22,490 --> 00:11:24,560 It must be in a blue barn, 182 00:11:24,560 --> 00:11:26,090 dot, dot, dot, dot, dot, 183 00:11:26,090 --> 00:11:28,330 lots and lots and lots of attributes, 184 00:11:28,330 --> 00:11:30,340 lots of information. 185 00:11:30,340 --> 00:11:35,050 Really highly differentiated. 186 00:11:35,050 --> 00:11:37,770 And it might be, at an extreme end, 187 00:11:37,770 --> 00:11:41,980 that this thing that I want is so obscure 188 00:11:43,390 --> 00:11:46,500 that I have to make it myself. 189 00:11:46,500 --> 00:11:51,500 So it might be that if I needed a laptop 190 00:11:52,667 --> 00:11:57,640 that is completely unique. 191 00:11:57,640 --> 00:12:00,280 It has this bundle of attributes, 192 00:12:00,280 --> 00:12:01,410 done in this way, 193 00:12:01,410 --> 00:12:04,870 made in this way, that nobody makes it. 194 00:12:04,870 --> 00:12:07,770 There's not a single firm on Earth 195 00:12:07,770 --> 00:12:12,190 that makes this specific kind of laptop that I need. 196 00:12:12,190 --> 00:12:15,563 It might be that I just have to make it myself. 197 00:12:17,520 --> 00:12:19,560 In the same way 198 00:12:19,560 --> 00:12:24,560 that if you want to build a loft bed 199 00:12:24,950 --> 00:12:28,210 for your apartment or your dorm room, 200 00:12:28,210 --> 00:12:31,070 it might be that there's a bunch of 'em available, 201 00:12:31,070 --> 00:12:33,120 and you can just go buy one, 202 00:12:33,120 --> 00:12:34,730 sort of buy a kit, 203 00:12:34,730 --> 00:12:37,850 but it might be that you want it to be really special, 204 00:12:37,850 --> 00:12:39,540 that's there's something about it 205 00:12:39,540 --> 00:12:42,820 that it's just not commonly available. 206 00:12:42,820 --> 00:12:44,390 A specific kind of wood, 207 00:12:44,390 --> 00:12:48,100 a specific size, a specific design. 208 00:12:48,100 --> 00:12:50,093 Something that it does. 209 00:12:51,100 --> 00:12:56,100 It has a coffee maker attached onto it. 210 00:12:57,080 --> 00:12:59,270 Something obscure like that. 211 00:12:59,270 --> 00:13:03,170 That it may be that it's so obscure, 212 00:13:03,170 --> 00:13:06,334 so unique, nobody makes this, 213 00:13:06,334 --> 00:13:10,650 and you're gonna have to just make it yourself. 214 00:13:10,650 --> 00:13:13,290 It's not available for sale. 215 00:13:13,290 --> 00:13:17,400 And in this case, this first bullet here 216 00:13:17,400 --> 00:13:20,170 that you are making it for yourself 217 00:13:20,170 --> 00:13:23,070 so you have complete control 218 00:13:23,070 --> 00:13:25,483 over what the end product looks like. 219 00:13:31,149 --> 00:13:36,149 The third example is strategic partnerships. 220 00:13:38,000 --> 00:13:42,800 And this is in between make or buy. 221 00:13:42,800 --> 00:13:47,800 So this creates hopefully win-win partnerships among firms. 222 00:13:51,240 --> 00:13:55,110 So these are best when this sort 223 00:13:55,110 --> 00:13:58,780 of vertical hierarchal arrangements 224 00:13:58,780 --> 00:14:02,320 are outside of your core competency. 225 00:14:04,360 --> 00:14:07,610 So it might be that again, 226 00:14:07,610 --> 00:14:11,120 I don't wanna have to have a dairy farm for all my milk. 227 00:14:11,120 --> 00:14:13,693 I don't wanna have to make my own laptop. 228 00:14:14,710 --> 00:14:17,200 That's not what I do best. 229 00:14:17,200 --> 00:14:21,260 But nobody makes it exactly how I like it. 230 00:14:21,260 --> 00:14:24,470 So these sort of arm length suppliers 231 00:14:24,470 --> 00:14:28,870 aren't willing to invest in the equipment 232 00:14:28,870 --> 00:14:31,600 or share the information needed. 233 00:14:31,600 --> 00:14:36,600 So in the case of my blue barn, 234 00:14:36,960 --> 00:14:39,123 sing to the cows milk, 235 00:14:40,080 --> 00:14:43,140 unless I can buy a whole lot of it, 236 00:14:43,140 --> 00:14:45,920 they're not gonna go the bother 237 00:14:45,920 --> 00:14:49,110 to make this really obscure milk 238 00:14:49,110 --> 00:14:51,023 to suit just my needs. 239 00:14:52,190 --> 00:14:54,770 And in the same way, 240 00:14:54,770 --> 00:14:56,880 the laptop maker 241 00:14:57,800 --> 00:14:58,930 isn't gonna do it. 242 00:14:58,930 --> 00:15:03,010 So I have to find someone who can do it sort 243 00:15:03,010 --> 00:15:05,200 of well enough, 244 00:15:05,200 --> 00:15:10,200 or to guarantee enough business 245 00:15:11,050 --> 00:15:13,120 in the long term 246 00:15:13,120 --> 00:15:17,710 that it's worthwhile for them to make the investment, 247 00:15:17,710 --> 00:15:20,023 and to meet my needs. 248 00:15:21,180 --> 00:15:24,725 So a good example of this 249 00:15:24,725 --> 00:15:27,930 is a food hub. 250 00:15:27,930 --> 00:15:31,840 So they act as a strategic partner 251 00:15:31,840 --> 00:15:35,502 between farmers and buyers. 252 00:15:35,502 --> 00:15:40,502 so especially for the buyer, 253 00:15:41,840 --> 00:15:45,240 they want fresh local produce, 254 00:15:45,240 --> 00:15:49,420 and they don't wanna have to run a farm. 255 00:15:49,420 --> 00:15:51,620 So they don't wanna make it, 256 00:15:51,620 --> 00:15:56,620 but the kind of fresh local produce may not be available 257 00:15:56,790 --> 00:16:00,840 from the broadline, mainstream distributor, 258 00:16:00,840 --> 00:16:04,020 so they enter into a partnership 259 00:16:04,020 --> 00:16:06,010 with the food hub that helps them, 260 00:16:06,010 --> 00:16:08,440 that sort of in between space. 261 00:16:08,440 --> 00:16:10,800 And I'm gonna give another example too. 262 00:16:10,800 --> 00:16:14,500 Hopefully, these are marked by a fair sharing 263 00:16:14,500 --> 00:16:16,380 of risk and reward, 264 00:16:16,380 --> 00:16:21,270 and being able to keep the differentiation 265 00:16:21,270 --> 00:16:23,610 of the product moving forward. 266 00:16:23,610 --> 00:16:27,280 So one of the things that food hubs do extremely well 267 00:16:27,280 --> 00:16:31,060 is identifying which farm it comes from, 268 00:16:31,060 --> 00:16:36,060 and saying this is from Susan's farm 269 00:16:36,330 --> 00:16:39,800 and she is known for having the best kale. 270 00:16:39,800 --> 00:16:41,950 This kale is from her farm. 271 00:16:41,950 --> 00:16:44,140 And these are all the things that she does 272 00:16:44,140 --> 00:16:46,183 to make her kale so amazing. 273 00:16:47,450 --> 00:16:49,230 And it works like that. 274 00:16:49,230 --> 00:16:53,430 So I'm gonna give you an example, 275 00:16:53,430 --> 00:16:58,237 which I hope will help to really highlight 276 00:17:00,080 --> 00:17:01,550 these three options, 277 00:17:01,550 --> 00:17:03,420 and when they are used, 278 00:17:03,420 --> 00:17:08,410 and when each one is the best, 279 00:17:08,410 --> 00:17:12,103 depending on what the business wants and does. 280 00:17:15,010 --> 00:17:16,263 So here's the example. 281 00:17:17,540 --> 00:17:18,373 This a show. 282 00:17:18,373 --> 00:17:19,810 I think my daughter liked it. 283 00:17:19,810 --> 00:17:20,930 I haven't ever seen it. 284 00:17:20,930 --> 00:17:23,350 Maybe you have. 285 00:17:23,350 --> 00:17:26,000 And I don't know any of the decisions 286 00:17:26,000 --> 00:17:26,970 that he actually makes. 287 00:17:26,970 --> 00:17:31,113 But here's our application. 288 00:17:31,950 --> 00:17:35,153 Suppose you own a hamburger stand. 289 00:17:36,180 --> 00:17:39,900 So you are known for having the juiciest, 290 00:17:39,900 --> 00:17:44,143 best cooked, most delicious burgers in town. 291 00:17:45,160 --> 00:17:48,340 So there are some inputs 292 00:17:48,340 --> 00:17:52,080 that obviously you are going to buy. 293 00:17:52,080 --> 00:17:54,820 So it wouldn't really make sense 294 00:17:54,820 --> 00:17:57,840 for you to make your own napkins 295 00:17:57,840 --> 00:18:01,683 or to make your own plates. 296 00:18:03,055 --> 00:18:04,880 On the other hand, 297 00:18:04,880 --> 00:18:09,880 it doesn't make sense for you to hire someone 298 00:18:10,060 --> 00:18:12,090 to make and sell the burgers 299 00:18:12,090 --> 00:18:13,390 'cause that's what you do. 300 00:18:14,320 --> 00:18:17,570 But let's look at buns. 301 00:18:17,570 --> 00:18:22,340 So it's reasonable that most people 302 00:18:22,340 --> 00:18:25,100 are going to want their burger on a bun. 303 00:18:25,100 --> 00:18:27,660 So obviously, if you run a hamburger stand, 304 00:18:27,660 --> 00:18:28,973 you will need some buns. 305 00:18:30,170 --> 00:18:34,740 Now, basically any bun will do 306 00:18:35,840 --> 00:18:38,190 as long as it's the right size 307 00:18:38,190 --> 00:18:40,270 and it's of good quality. 308 00:18:40,270 --> 00:18:42,180 Just an ordinary bun. 309 00:18:42,180 --> 00:18:44,990 You're not looking for anything special. 310 00:18:44,990 --> 00:18:47,730 Then certainly you would buy it. 311 00:18:47,730 --> 00:18:52,730 You would probably just work with your distributor, 312 00:18:54,270 --> 00:18:57,559 look at a list of buns that they have. 313 00:18:57,559 --> 00:19:00,360 There'll be a lot of options I imagine. 314 00:19:00,360 --> 00:19:02,670 They're all basically the same 315 00:19:02,670 --> 00:19:04,710 but look 'em over. 316 00:19:04,710 --> 00:19:07,340 Find the one that works best for you. 317 00:19:07,340 --> 00:19:10,810 It might be the lowest priced one. 318 00:19:13,490 --> 00:19:15,870 But if you want an ordinary bun, 319 00:19:15,870 --> 00:19:19,040 widely available, you're gonna buy it. 320 00:19:19,040 --> 00:19:24,040 However, maybe you want a really special bun. 321 00:19:24,940 --> 00:19:27,810 So again, just sort of adding attributes on. 322 00:19:27,810 --> 00:19:30,883 So if an ordinary bun won't do, 323 00:19:31,730 --> 00:19:33,663 you need a special bun. 324 00:19:34,690 --> 00:19:38,970 Whole grain, gluten free, organic, 325 00:19:38,970 --> 00:19:43,970 hand mixed, grains grown on a small farm 326 00:19:44,971 --> 00:19:48,130 by a female-owned farmer 327 00:19:48,130 --> 00:19:50,330 who sings while she harvests them, 328 00:19:50,330 --> 00:19:52,200 dot, dot, dot, dot, dot. 329 00:19:52,200 --> 00:19:54,323 Lots and lots and lots of attributes. 330 00:19:55,270 --> 00:19:58,270 First of all, that bun is probably not going 331 00:19:58,270 --> 00:20:03,270 to be available from your broadline, mainstream distributor. 332 00:20:04,440 --> 00:20:09,170 And the more kind of obscure attributes 333 00:20:09,170 --> 00:20:13,050 that you add on and require, 334 00:20:13,050 --> 00:20:15,160 the number of suppliers 335 00:20:15,160 --> 00:20:18,100 who are ready, willing and able to do that 336 00:20:18,100 --> 00:20:19,850 will get smaller and smaller, 337 00:20:19,850 --> 00:20:23,070 and it may be that the bun that you want 338 00:20:23,070 --> 00:20:26,580 is so obscure, nobody makes it, 339 00:20:26,580 --> 00:20:30,070 in which case, you will have to make those buns yourself. 340 00:20:30,070 --> 00:20:31,690 So you will have to bake them 341 00:20:31,690 --> 00:20:33,920 and be all the one at the make end 342 00:20:33,920 --> 00:20:36,140 so you can control it 343 00:20:36,140 --> 00:20:39,990 because think about transaction costs. 344 00:20:39,990 --> 00:20:41,760 Who makes it? 345 00:20:41,760 --> 00:20:42,603 Nobody. 346 00:20:43,530 --> 00:20:45,150 How much does it cost? 347 00:20:45,150 --> 00:20:47,890 Well, we know how much a mainstream bun costs 348 00:20:47,890 --> 00:20:49,930 but something so obscure, 349 00:20:49,930 --> 00:20:52,030 there really isn't an established market, 350 00:20:52,030 --> 00:20:54,033 so it's gonna take a lot of time. 351 00:20:54,033 --> 00:20:56,450 What's a good price? 352 00:20:56,450 --> 00:21:00,450 And then last, how do you know that it came 353 00:21:00,450 --> 00:21:04,090 from local farm, and that the farmer sings 354 00:21:04,090 --> 00:21:07,320 when she's harvesting the grains 355 00:21:07,320 --> 00:21:08,543 and dot, dot, dot, dot? 356 00:21:09,609 --> 00:21:14,609 So having really obscure, specific specifications adds 357 00:21:17,360 --> 00:21:19,240 to the transaction costs, 358 00:21:19,240 --> 00:21:21,420 and eventually you may just need 359 00:21:21,420 --> 00:21:22,673 to do it yourself. 360 00:21:23,860 --> 00:21:27,420 Now, there may be a middle ground. 361 00:21:27,420 --> 00:21:32,420 That the ordinary bun from the distributor doesn't work. 362 00:21:32,520 --> 00:21:35,760 You really don't wanna have to set up a bakery 363 00:21:35,760 --> 00:21:37,770 because what you do is burgers. 364 00:21:37,770 --> 00:21:40,220 That's what you love, that's what you do best. 365 00:21:40,220 --> 00:21:44,370 So you might form a partnership with a bakery. 366 00:21:44,370 --> 00:21:48,280 Find one that's willing to work with you. 367 00:21:48,280 --> 00:21:50,110 You may have to invest. 368 00:21:50,110 --> 00:21:54,010 You may have to put some skin in the game. 369 00:21:54,010 --> 00:21:58,830 You may have to commit to some sort of quantity 370 00:21:58,830 --> 00:22:01,922 or time so it's worth their while. 371 00:22:01,922 --> 00:22:06,910 If there's a specific kind of oven or mixer, 372 00:22:06,910 --> 00:22:10,100 you might have to buy that for them. 373 00:22:10,100 --> 00:22:13,400 But you can form a partnership 374 00:22:13,400 --> 00:22:17,520 such that they are willing to bake it for you 375 00:22:18,640 --> 00:22:22,180 in exactly or very close to the way that you want it 376 00:22:22,180 --> 00:22:24,823 but you don't have to do it yourself. 377 00:22:26,080 --> 00:22:30,373 So hopefully, through that example, that works. 378 00:22:38,260 --> 00:22:42,690 When you think about, to go back to supply chains, 379 00:22:42,690 --> 00:22:46,710 and how does it get to the customer, 380 00:22:46,710 --> 00:22:51,710 in a way, B2C is you make marketing. 381 00:22:53,380 --> 00:22:55,770 So if you're a farmer, 382 00:22:55,770 --> 00:22:57,890 and you're going to a farmers market, 383 00:22:57,890 --> 00:23:00,580 that you're making all the marketing. 384 00:23:00,580 --> 00:23:03,640 You're showing up at that place, 385 00:23:03,640 --> 00:23:05,840 you sell it, you take the money, 386 00:23:05,840 --> 00:23:08,350 you describe it, you do the layout, 387 00:23:08,350 --> 00:23:09,950 you do the packaging. 388 00:23:09,950 --> 00:23:12,533 You're making all of those marketing services. 389 00:23:15,980 --> 00:23:18,740 If you are in a B2B model, 390 00:23:18,740 --> 00:23:22,120 you are sort of buying the marketing. 391 00:23:22,120 --> 00:23:24,653 So if you sell to a distributor, 392 00:23:25,540 --> 00:23:28,340 they find the customers. 393 00:23:28,340 --> 00:23:30,970 They figure out what the order is. 394 00:23:30,970 --> 00:23:33,210 They distribute it. 395 00:23:33,210 --> 00:23:36,380 They bill, they collect money. 396 00:23:36,380 --> 00:23:39,350 They do a lot of those marketing services, 397 00:23:39,350 --> 00:23:42,630 and then they pay you for the product. 398 00:23:45,570 --> 00:23:48,043 So in B2C, 399 00:23:49,007 --> 00:23:53,580 the marketing effort goes all the way to the customer. 400 00:23:53,580 --> 00:23:54,910 You are making it. 401 00:23:54,910 --> 00:23:59,200 And in B2B, basically the marketing ends 402 00:23:59,200 --> 00:24:03,190 at the end of your loading dock say. 403 00:24:03,190 --> 00:24:06,230 And everything from then on, 404 00:24:06,230 --> 00:24:09,100 you're buying the marketing services 405 00:24:09,100 --> 00:24:11,020 from the distributor. 406 00:24:11,020 --> 00:24:13,083 So hopefully that makes sense. 407 00:24:18,410 --> 00:24:22,700 The last topic of the day is how to address place 408 00:24:22,700 --> 00:24:25,530 in a service-based business. 409 00:24:25,530 --> 00:24:27,593 I'm imagining a lot of you will. 410 00:24:28,710 --> 00:24:29,660 So one thing to think 411 00:24:29,660 --> 00:24:32,180 about is is will you have a storefront? 412 00:24:32,180 --> 00:24:34,270 Will you have an actual place? 413 00:24:34,270 --> 00:24:37,100 Or will it have a virtual place? 414 00:24:37,100 --> 00:24:40,270 What attributes should it have? 415 00:24:40,270 --> 00:24:43,453 And what are some of the trade-offs that you will face? 416 00:24:44,450 --> 00:24:49,170 So an obvious one is if you actually have a place, 417 00:24:49,170 --> 00:24:51,710 that is a lot of an upfront cost. 418 00:24:51,710 --> 00:24:54,533 You have to buy the building or pay rent. 419 00:24:55,610 --> 00:24:59,560 Whereas if you have a virtual place, 420 00:24:59,560 --> 00:25:02,333 then not, such as a website. 421 00:25:03,360 --> 00:25:06,930 So if you have a car repair place, 422 00:25:06,930 --> 00:25:09,568 like you have to have a place there 423 00:25:09,568 --> 00:25:11,230 but other things not. 424 00:25:11,230 --> 00:25:14,310 And as far as location goes, 425 00:25:14,310 --> 00:25:19,310 so usually, some place that has a lot of foot traffic 426 00:25:19,400 --> 00:25:22,300 that will sort of naturally bring business in, 427 00:25:22,300 --> 00:25:26,380 like Church Street will have much higher rent 428 00:25:26,380 --> 00:25:28,693 or higher cost than somewhere 429 00:25:28,693 --> 00:25:31,023 that's more out of the way. 430 00:25:32,390 --> 00:25:35,333 And we'll talk about this more when we discuss it. 431 00:25:38,490 --> 00:25:40,740 So we talked about the four Ps 432 00:25:40,740 --> 00:25:44,300 but there's three additional Ps in a service. 433 00:25:44,300 --> 00:25:46,690 First is people. 434 00:25:46,690 --> 00:25:51,590 Who interacts with the customers? 435 00:25:51,590 --> 00:25:54,790 Who performs the tasks? 436 00:25:54,790 --> 00:25:59,770 So if it's car repair, who makes the appointments? 437 00:25:59,770 --> 00:26:02,420 Who actually fixes the cars? 438 00:26:02,420 --> 00:26:04,930 There is process. 439 00:26:04,930 --> 00:26:06,550 So how do you do it? 440 00:26:06,550 --> 00:26:07,480 How do you fix the car? 441 00:26:07,480 --> 00:26:11,100 What is it about you that gives you an advantage? 442 00:26:11,100 --> 00:26:14,200 If you're a cleaning service, 443 00:26:14,200 --> 00:26:16,983 if you're a dog walking service, 444 00:26:18,850 --> 00:26:20,470 what do you do great? 445 00:26:20,470 --> 00:26:21,760 What's great about you? 446 00:26:21,760 --> 00:26:25,990 What are the attributes about your process? 447 00:26:25,990 --> 00:26:27,366 What is it? 448 00:26:27,366 --> 00:26:29,800 Are you fast? Are you better? 449 00:26:29,800 --> 00:26:33,190 Are you consistent? Are you convenient? 450 00:26:33,190 --> 00:26:36,760 Hopefully you'll be good at all of those 451 00:26:36,760 --> 00:26:39,893 and really great at least one. 452 00:26:41,680 --> 00:26:43,860 Finally, in many cases, 453 00:26:43,860 --> 00:26:45,790 you have to look like a business, 454 00:26:45,790 --> 00:26:47,563 that there's physical evidence. 455 00:26:50,900 --> 00:26:55,350 So we'll talk about what does a classroom look like? 456 00:26:55,350 --> 00:26:58,100 I know that we're not actually in a classroom 457 00:26:58,100 --> 00:27:03,080 for fall of 2020 458 00:27:03,080 --> 00:27:06,000 but what is it that you know 459 00:27:06,000 --> 00:27:09,835 that you're in a classroom when you walk into it? 460 00:27:09,835 --> 00:27:14,670 What does every hotel have? 461 00:27:14,670 --> 00:27:16,910 What does every restaurant have? 462 00:27:16,910 --> 00:27:20,950 And then finally, what's the physical evidence 463 00:27:20,950 --> 00:27:22,530 for a virtual business. 464 00:27:22,530 --> 00:27:24,930 What makes you know like yeah, 465 00:27:24,930 --> 00:27:28,280 this is a real thing, this is not a scam? 466 00:27:28,280 --> 00:27:30,013 So we can discuss that. 467 00:27:34,600 --> 00:27:36,110 A few other things here 468 00:27:36,110 --> 00:27:40,170 is that a service is fairly intangible. 469 00:27:40,170 --> 00:27:43,320 That it cannot be held, seen or touched. 470 00:27:43,320 --> 00:27:47,630 That a car repair or dog walk, it's not a thing. 471 00:27:47,630 --> 00:27:49,743 It's an activity. 472 00:27:50,980 --> 00:27:52,433 It tends to be heterogeneous. 473 00:27:54,790 --> 00:27:57,950 That every car needs its own kind of repairs, 474 00:27:57,950 --> 00:28:00,770 and every house needs its own kind of washing, 475 00:28:00,770 --> 00:28:03,690 and maybe every dog needs its own kind of walk. 476 00:28:03,690 --> 00:28:07,270 So it may not be exactly the same every time. 477 00:28:07,270 --> 00:28:10,350 It cannot be consumed later. 478 00:28:10,350 --> 00:28:15,350 It's not like I can call you to walk my dog now 479 00:28:16,270 --> 00:28:20,690 and my dog will get a walk in three weeks. 480 00:28:20,690 --> 00:28:24,800 And since the provider is the product, 481 00:28:24,800 --> 00:28:28,260 and it's delivered and consumed at the same time, 482 00:28:28,260 --> 00:28:30,990 it's inseparable and simultaneous. 483 00:28:30,990 --> 00:28:32,840 So I'm gonna talk to you in the next slide 484 00:28:32,840 --> 00:28:37,840 about what really the big takeaway point. 485 00:28:39,790 --> 00:28:40,960 So there's two. 486 00:28:40,960 --> 00:28:43,940 First of all, you are the product. 487 00:28:43,940 --> 00:28:47,150 That you have to establish trust 488 00:28:47,150 --> 00:28:51,870 because the best kind of promotion is word of mouth. 489 00:28:51,870 --> 00:28:55,990 The most credible thing is another customer saying 490 00:28:55,990 --> 00:28:59,550 this business does it right, they treat me right. 491 00:28:59,550 --> 00:29:03,970 And finally, customer retention is so important. 492 00:29:03,970 --> 00:29:07,030 It's so much easier and more efficient 493 00:29:07,030 --> 00:29:10,360 to keep an old one than to acquire a new one. 494 00:29:10,360 --> 00:29:12,340 So treat them right. 495 00:29:12,340 --> 00:29:15,730 And as you get to know them better, 496 00:29:15,730 --> 00:29:20,040 you are better able to customize your service 497 00:29:20,040 --> 00:29:21,230 to best meet one. 498 00:29:21,230 --> 00:29:23,890 So if you're a dog walker 499 00:29:23,890 --> 00:29:26,000 and you know that there's certain things 500 00:29:26,000 --> 00:29:28,180 that this dog loves, a certain kind of treat, 501 00:29:28,180 --> 00:29:31,100 a certain scratch, a certain place they love to go, 502 00:29:31,100 --> 00:29:36,100 or you know that they have special medical needs 503 00:29:36,460 --> 00:29:39,720 and that their owner can come to rely on you, 504 00:29:39,720 --> 00:29:42,343 that you're gonna make sure you really take good care 505 00:29:42,343 --> 00:29:44,733 of that dog. 506 00:29:47,240 --> 00:29:50,470 In that way, keeping customers, 507 00:29:50,470 --> 00:29:52,500 and building trust with them 508 00:29:52,500 --> 00:29:56,823 is the most important thing that you can do in a service. 509 00:30:00,220 --> 00:30:03,310 I would like you to watch this. 510 00:30:03,310 --> 00:30:07,360 And we're gonna talk about where 511 00:30:07,360 --> 00:30:09,600 and how does this farmer, 512 00:30:09,600 --> 00:30:12,760 what kind of marketing does he make 513 00:30:12,760 --> 00:30:14,120 and what does he buy? 514 00:30:14,120 --> 00:30:16,133 And also, what is the most, 515 00:30:17,250 --> 00:30:21,243 what does he prioritize and why? 516 00:30:24,040 --> 00:30:26,810 So again, here is your homework. 517 00:30:26,810 --> 00:30:28,530 Feel free to pause this. 518 00:30:28,530 --> 00:30:32,520 We'll discuss it, so I make sure that it's clear. 519 00:30:32,520 --> 00:30:34,450 Here's part one, 520 00:30:34,450 --> 00:30:36,740 and this is for a product or a service. 521 00:30:36,740 --> 00:30:38,583 So do one or the other. 522 00:30:40,590 --> 00:30:43,510 And in part two, how will they change over time? 523 00:30:43,510 --> 00:30:46,300 And in three, walk me through three examples 524 00:30:46,300 --> 00:30:49,493 of the make or buy question. 525 00:30:51,930 --> 00:30:54,450 This is what we did. Thank you. 526 00:30:54,450 --> 00:30:59,134 Make sure that you do the assessment before class. 527 00:30:59,134 --> 00:31:00,453 Have a good day. 528 00:31:03,230 --> 00:31:05,330 This is the end of part three. 529 00:31:05,330 --> 00:31:06,420 This is the last part. 530 00:31:06,420 --> 00:31:09,023 So please do the assessment before class.