- [Instructor] This is part three
of the video lecture on place.
So now we're going to talk about how do you get the inputs
that you need?
How do you get the materials,
and the services that your business needs?
So all businesses I would say need inputs of some kind.
They buy things from somewhere
or in some cases, they make it themselves.
And they do some sort of transformation of it,
and then they sell this transformed product.
So this photo that you see here
is a man named Ronald Coase
who was a Nobel Prize-winning economist.
And one of his landmark work
is on transaction costs.
And we'll talk a little bit about
transaction costs, and specifically,
he applied it to what he called the theory of the firm.
And the make or buy decision.
So a firm needs some kind of input.
So I am a professor say.
There are certain inputs that I need.
Do I make them myself or do I buy them?
So an example is a laptop.
Right now, I am talking to a laptop.
It is recording.
It really doesn't make sense
for me to make my own laptop.
I don't really know how to do it.
There's a lot of 'em available.
I can just buy it and use it.
On the other hand,
it doesn't make sense for me to pay someone
to teach the class for me.
That I feel like I do that well.
It's something I enjoy.
I don't wanna have to pay somebody to do it.
I wanna keep my whole paycheck for myself.
So the instruction part I make.
And Coase argued that this is determined
by transaction costs.
And he talked about how this helps
to determine that the make or buy decision
is determined by transaction costs.
And that the make or buy decision helps
to outline the boundary of the firm.
What do I do? What do I not do?
So for me, the boundary of my firm
is I deliver the material,
I develop it and deliver it myself
but I don't make computers.
And hopefully this will make more sense as we move forward.
So anyway, Coase talks about that there are three kinds
of transaction costs.
Transaction cost is the cost of doing business.
The cost of sellers and buyers finding each other
and reaching an agreement that works for both.
So from the buyer standpoint,
I have three types.
First is search.
So who has this thing?
Who has it for sale?
Who's out there that has the thing that I want?
So in the case of a laptop,
there's Apple, there's Dell, there's lots of 'em out there.
Next is how much do I pay?
So there's a clear market for
laptops.
I can go online, I can go to a store.
It has a fairly well-established price.
And finally, how do I ensure
that what I want is what I am getting?
So in this case,
again, a laptop has fairly clear specifications
and it should perform in ways that I hope it does.
So in the case of me finding someone
to deliver it, this is a much more unusual thing.
So first, I would have to find somebody
who has enough expertise.
I would have to figure out
how I would have to pay this person.
And last, I would have to monitor him
and make sure that he is delivering the material
in a way that works
and is effective,
and that gives students the value
that they deserve.
So what I'm arguing here, and what Coase argued
is the more differentiated a product is,
the higher the transaction costs,
and the more common it is, the lower.
So let's think about a true commodity,
such as that gallon of white milk
with the red cap in the plastic jug.
So search, who has it?
Lots of stores have it.
Grocery stores have it,
gas stations have it, convenience stores has it.
Broadly available.
What do I pay?
Well, there's a very well-established price.
Going from store to store,
the price for that gallon of milk
is probably gonna be pretty close.
And how do I know I'm getting it?
Well, because it's so homogenous,
it's a one-size-fits-all,
basically every one is the same,
that there's not a lot of information there,
and if I want this gallon of white milk,
really, they're all the same,
and I really don't have to go to a lot of bother
to make sure that it's exactly what I want.
And the last point on this slide
is that there are three options.
Spot markets, vertical integration
and strategic partnerships.
And I am going to talk about each one.
The first kind of market
or the first option is spot markets.
Spot markets are all the way at the buy end
of the continuum.
So this is best for inputs
that are sort of at the commodity end,
that are broadly available,
they're routinely bought and sold.
They tend to be very homogenous
and routine in quality.
There are many vendors. There are many options.
And in many cases, the buyer should just select one
that works for them.
In many case, the lowest
priced one or maybe the most convenient one.
So again, if you are buying a gallon of milk
that doesn't make sense for you
to make the milk yourself,
to have a dairy farm
and to do all that work yourself,
it makes much more sense to buy it.
As a professor, it makes more sense for me to buy a laptop.
I don't know how to make them.
There are many of 'em available.
I can go online, I could go to a store.
And I just go and pick the one that's best for me.
So inputs that are broadly available,
that are routinely bought and sold,
those are the ones that you would use a spot market
and buy them.
And these tend to be fairly arms length,
and anonymous relationships.
So I might go buy the milk,
the gallon of milk from Hannaford's one day
because I'm doing some grocery shopping.
But it might be that I just need to,
I'm already at the drug store
to pick up a prescription,
and I remember that I need milk too.
So I really don't work with the same person all the time.
I don't tell them how to make that milk.
I don't know what farm that it comes from.
There's just lots of it available.
I just go and pick the one
that works best for me.
And I'm gonna say a bit more.
I'm gonna give you a more concrete example
for a specific business for each of these.
At the other end is the make.
So this is when something is highly specialized.
It's one of a kind.
I'm really fussy about what it has to look like.
That it really has to be suited
to my particular circumstances.
And so since it is highly specialized,
there's not going to be a whole lot of suppliers.
So it might be that I only want milk
that is organic, free range cows,
fed a really special kind of hay.
Whoever milks the cows has to sing
to the cows.
It must be in a blue barn,
dot, dot, dot, dot, dot,
lots and lots and lots of attributes,
lots of information.
Really highly differentiated.
And it might be, at an extreme end,
that this thing that I want is so obscure
that I have to make it myself.
So it might be that if I needed a laptop
that is completely unique.
It has this bundle of attributes,
done in this way,
made in this way, that nobody makes it.
There's not a single firm on Earth
that makes this specific kind of laptop that I need.
It might be that I just have to make it myself.
In the same way
that if you want to build a loft bed
for your apartment or your dorm room,
it might be that there's a bunch of 'em available,
and you can just go buy one,
sort of buy a kit,
but it might be that you want it to be really special,
that's there's something about it
that it's just not commonly available.
A specific kind of wood,
a specific size, a specific design.
Something that it does.
It has a coffee maker attached onto it.
Something obscure like that.
That it may be that it's so obscure,
so unique, nobody makes this,
and you're gonna have to just make it yourself.
It's not available for sale.
And in this case, this first bullet here
that you are making it for yourself
so you have complete control
over what the end product looks like.
The third example is strategic partnerships.
And this is in between make or buy.
So this creates hopefully win-win partnerships among firms.
So these are best when this sort
of vertical hierarchal arrangements
are outside of your core competency.
So it might be that again,
I don't wanna have to have a dairy farm for all my milk.
I don't wanna have to make my own laptop.
That's not what I do best.
But nobody makes it exactly how I like it.
So these sort of arm length suppliers
aren't willing to invest in the equipment
or share the information needed.
So in the case of my blue barn,
sing to the cows milk,
unless I can buy a whole lot of it,
they're not gonna go the bother
to make this really obscure milk
to suit just my needs.
And in the same way,
the laptop maker
isn't gonna do it.
So I have to find someone who can do it sort
of well enough,
or to guarantee enough business
in the long term
that it's worthwhile for them to make the investment,
and to meet my needs.
So a good example of this
is a food hub.
So they act as a strategic partner
between farmers and buyers.
so especially for the buyer,
they want fresh local produce,
and they don't wanna have to run a farm.
So they don't wanna make it,
but the kind of fresh local produce may not be available
from the broadline, mainstream distributor,
so they enter into a partnership
with the food hub that helps them,
that sort of in between space.
And I'm gonna give another example too.
Hopefully, these are marked by a fair sharing
of risk and reward,
and being able to keep the differentiation
of the product moving forward.
So one of the things that food hubs do extremely well
is identifying which farm it comes from,
and saying this is from Susan's farm
and she is known for having the best kale.
This kale is from her farm.
And these are all the things that she does
to make her kale so amazing.
And it works like that.
So I'm gonna give you an example,
which I hope will help to really highlight
these three options,
and when they are used,
and when each one is the best,
depending on what the business wants and does.
So here's the example.
This a show.
I think my daughter liked it.
I haven't ever seen it.
Maybe you have.
And I don't know any of the decisions
that he actually makes.
But here's our application.
Suppose you own a hamburger stand.
So you are known for having the juiciest,
best cooked, most delicious burgers in town.
So there are some inputs
that obviously you are going to buy.
So it wouldn't really make sense
for you to make your own napkins
or to make your own plates.
On the other hand,
it doesn't make sense for you to hire someone
to make and sell the burgers
'cause that's what you do.
But let's look at buns.
So it's reasonable that most people
are going to want their burger on a bun.
So obviously, if you run a hamburger stand,
you will need some buns.
Now, basically any bun will do
as long as it's the right size
and it's of good quality.
Just an ordinary bun.
You're not looking for anything special.
Then certainly you would buy it.
You would probably just work with your distributor,
look at a list of buns that they have.
There'll be a lot of options I imagine.
They're all basically the same
but look 'em over.
Find the one that works best for you.
It might be the lowest priced one.
But if you want an ordinary bun,
widely available, you're gonna buy it.
However, maybe you want a really special bun.
So again, just sort of adding attributes on.
So if an ordinary bun won't do,
you need a special bun.
Whole grain, gluten free, organic,
hand mixed, grains grown on a small farm
by a female-owned farmer
who sings while she harvests them,
dot, dot, dot, dot, dot.
Lots and lots and lots of attributes.
First of all, that bun is probably not going
to be available from your broadline, mainstream distributor.
And the more kind of obscure attributes
that you add on and require,
the number of suppliers
who are ready, willing and able to do that
will get smaller and smaller,
and it may be that the bun that you want
is so obscure, nobody makes it,
in which case, you will have to make those buns yourself.
So you will have to bake them
and be all the one at the make end
so you can control it
because think about transaction costs.
Who makes it?
Nobody.
How much does it cost?
Well, we know how much a mainstream bun costs
but something so obscure,
there really isn't an established market,
so it's gonna take a lot of time.
What's a good price?
And then last, how do you know that it came
from local farm, and that the farmer sings
when she's harvesting the grains
and dot, dot, dot, dot?
So having really obscure, specific specifications adds
to the transaction costs,
and eventually you may just need
to do it yourself.
Now, there may be a middle ground.
That the ordinary bun from the distributor doesn't work.
You really don't wanna have to set up a bakery
because what you do is burgers.
That's what you love, that's what you do best.
So you might form a partnership with a bakery.
Find one that's willing to work with you.
You may have to invest.
You may have to put some skin in the game.
You may have to commit to some sort of quantity
or time so it's worth their while.
If there's a specific kind of oven or mixer,
you might have to buy that for them.
But you can form a partnership
such that they are willing to bake it for you
in exactly or very close to the way that you want it
but you don't have to do it yourself.
So hopefully, through that example, that works.
When you think about, to go back to supply chains,
and how does it get to the customer,
in a way, B2C is you make marketing.
So if you're a farmer,
and you're going to a farmers market,
that you're making all the marketing.
You're showing up at that place,
you sell it, you take the money,
you describe it, you do the layout,
you do the packaging.
You're making all of those marketing services.
If you are in a B2B model,
you are sort of buying the marketing.
So if you sell to a distributor,
they find the customers.
They figure out what the order is.
They distribute it.
They bill, they collect money.
They do a lot of those marketing services,
and then they pay you for the product.
So in B2C,
the marketing effort goes all the way to the customer.
You are making it.
And in B2B, basically the marketing ends
at the end of your loading dock say.
And everything from then on,
you're buying the marketing services
from the distributor.
So hopefully that makes sense.
The last topic of the day is how to address place
in a service-based business.
I'm imagining a lot of you will.
So one thing to think
about is is will you have a storefront?
Will you have an actual place?
Or will it have a virtual place?
What attributes should it have?
And what are some of the trade-offs that you will face?
So an obvious one is if you actually have a place,
that is a lot of an upfront cost.
You have to buy the building or pay rent.
Whereas if you have a virtual place,
then not, such as a website.
So if you have a car repair place,
like you have to have a place there
but other things not.
And as far as location goes,
so usually, some place that has a lot of foot traffic
that will sort of naturally bring business in,
like Church Street will have much higher rent
or higher cost than somewhere
that's more out of the way.
And we'll talk about this more when we discuss it.
So we talked about the four Ps
but there's three additional Ps in a service.
First is people.
Who interacts with the customers?
Who performs the tasks?
So if it's car repair, who makes the appointments?
Who actually fixes the cars?
There is process.
So how do you do it?
How do you fix the car?
What is it about you that gives you an advantage?
If you're a cleaning service,
if you're a dog walking service,
what do you do great?
What's great about you?
What are the attributes about your process?
What is it?
Are you fast? Are you better?
Are you consistent? Are you convenient?
Hopefully you'll be good at all of those
and really great at least one.
Finally, in many cases,
you have to look like a business,
that there's physical evidence.
So we'll talk about what does a classroom look like?
I know that we're not actually in a classroom
for fall of 2020
but what is it that you know
that you're in a classroom when you walk into it?
What does every hotel have?
What does every restaurant have?
And then finally, what's the physical evidence
for a virtual business.
What makes you know like yeah,
this is a real thing, this is not a scam?
So we can discuss that.
A few other things here
is that a service is fairly intangible.
That it cannot be held, seen or touched.
That a car repair or dog walk, it's not a thing.
It's an activity.
It tends to be heterogeneous.
That every car needs its own kind of repairs,
and every house needs its own kind of washing,
and maybe every dog needs its own kind of walk.
So it may not be exactly the same every time.
It cannot be consumed later.
It's not like I can call you to walk my dog now
and my dog will get a walk in three weeks.
And since the provider is the product,
and it's delivered and consumed at the same time,
it's inseparable and simultaneous.
So I'm gonna talk to you in the next slide
about what really the big takeaway point.
So there's two.
First of all, you are the product.
That you have to establish trust
because the best kind of promotion is word of mouth.
The most credible thing is another customer saying
this business does it right, they treat me right.
And finally, customer retention is so important.
It's so much easier and more efficient
to keep an old one than to acquire a new one.
So treat them right.
And as you get to know them better,
you are better able to customize your service
to best meet one.
So if you're a dog walker
and you know that there's certain things
that this dog loves, a certain kind of treat,
a certain scratch, a certain place they love to go,
or you know that they have special medical needs
and that their owner can come to rely on you,
that you're gonna make sure you really take good care
of that dog.
In that way, keeping customers,
and building trust with them
is the most important thing that you can do in a service.
I would like you to watch this.
And we're gonna talk about where
and how does this farmer,
what kind of marketing does he make
and what does he buy?
And also, what is the most,
what does he prioritize and why?
So again, here is your homework.
Feel free to pause this.
We'll discuss it, so I make sure that it's clear.
Here's part one,
and this is for a product or a service.
So do one or the other.
And in part two, how will they change over time?
And in three, walk me through three examples
of the make or buy question.
This is what we did. Thank you.
Make sure that you do the assessment before class.
Have a good day.
This is the end of part three.
This is the last part.
So please do the assessment before class.