Strategic Leadership - Class 3

Product Differentiation

• Horizontal - Toyota vs Nissan, Peets vs Starbucks, Chocolate vs Vanilla
• Vertical - BMW vs Toyota

Walmart Case (Low Cost, Still Profit)

Industry - Discount Retail Stores
Walmart is a Mom & Pop shop killer.

Key Strategies
First Mover Advantage	They build multiple walmart stores in an area quickly so that competitor can't enter the market
Distribution Center	Walmart built their own distribution centers to avoid middle-man.
Technology	Walmart used bar codes in 1970s, which enabled Just in time replishment of inventory. No stock outs and No inventory sitting. No need of EOQ ordering. It helped reduce Shrinkage - store thefts. Stealing and returning from other store.
Replenishment Cycle	no more than 48 hrs. Cross-docking + Back-haul (return trip with other companies load using EDI) EDI allowed company to company information exchange
Less Inventory	Most of the inventory is restocked everyday from warehouse. Reduced Shrinkage

Consumer Psychology

• At Walmart, there was an effort to clean up shelves and make store cleaner, but sales went down. As consumer thought that the store is no longer cheap.
• Survivorship Bias While looking at data of top companies ROE, you are only looking at firms which survived. The list could be long of people who didn't make it.

5 Forces	Discount Stores Industry
Barrier to entry	Low
Threat of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitutes
Intensity of Competitive Rivalry	Competitive Advantage, Position

What's Walmart Good at?	Discount Stores Industry
Low Cost + Location (required)	Low. Walmart in the beginning competited with Mom & Pop prices.
Location	Walmart killed Mom and Pop shop, which used to source from Wholesalers (middle-man)
Technology	Walmart spent a lot of money in Technology. If a partner wants to work with Walmart, then they also need to invest a lot of money e.g. EDI. Walmart only dealt with big companies.

Framework
People	Sam Walton
Architecture
Routine
Culture	Buy Toyota or Tesla? When a company position itself separately in a different country, make sure you don't connect culture. e.g. Walmart cheap in one country, and high quality in China. Then you should not mix up culture of two.

Side Questions

1. Does Management Consulting Really Work?

   • In India, they studied textile industry where some companies had management consultant, while others didn't. They found out that companies with consultant did way better than the rest. Though their
     • But why don't you just copy the strategy of champion?
       • In US, successful companies just grow and grow, and unsuccessful gets wiped out soooner. It doesn't happen in India - because in India you don't hire strangers. You only hire relatives.
       • Prof Notes - it's hard to copy strategy of successful companies.

2. Why COGS of Walmart is higher than Industry standard?

   • Having a higher COGS in % term can be higher even when you are selling at low prices.

3. Can Walmart copy the what worked for them in East coast in West cost market?

   • In East coast, walmart displaced mom & pop shop. However at that time West coast their competitors were Kmart and Target, so they can not just copy paste their model. Similarly, Michael Jordan tried to do what worked for BasketBall to BaseBall good but it didn't work.

4. Topologist studies shapes based on how many holes do you have. For example donut and coffee cup has same number of holes.

5. Cannibalization is not good but it is good if somebody else going to eat your lunch.

6. Should Walmart go to product industry?

   • Berkeley Bowl has a lot of produce and they source from mom and pop suppliers
   • When Walmart came to produce market, they required selected suppliers, who can provide multiple produce instead of just one vegetable. Walmart has all vegetables packed

7. How can Walmart compete with Amazon?

   • Walmart started offering buy online and store pick up. To compete, Amazon bought whole foods.

Companies Story

Honda

After war, Japan was torned down and the only way people have electicity is by Honda portable generators. Honda is good with motors, so instead of becoming a power utility company they realized their speciality is in motors. They went on adding wheels.

Typewriter - Olivetti (US) | Remington (Italy)

In 1980s they were leader in typewriter business. Remington used to be biggest producers for guns before civil war. After war they pivoted to typewriter and now they in Razor business.

Microplane

Microplane made tools for fine wood working. They had very loyal brand recognition in carpentry space.

• What else can you do?
  • External View -
    • Example - Microsoft going from an on-prem company to cloud company.
  • Internal View - Company realizing what I am good at and going to a different industry.
    • Why limit to wood working, they went to food tools industry e.g. cheese graters.

Gillette - Flexibility

Gillette is in high margin business, 60%. If you are Gillette, who should you be worried about?

• Putting blade in plastic is the hardest part. So, companies in plastic business are your competitors. For example, Big makes plastic pen so they are big competitor.
• Big launches a new razor. What should Gillette do?
  • Price war - Big launches a cheaper razor
  • Product differentiation - Big comes with 2 blade razor, Gillette launches 3 blade razor and charge higher prices. ❌ Not good because this way you are giving away 2 blade market to big. Soon Big will compete in 3 blade razor market.
  • Gillette launches new cheap pens called PaperMate - the Big main profit generation company. Later, Big retreated the razor market. Takeaway - If you have particular skillset and have great margin e.g. 60%, still a competitor can come with higher cost and eat your lunch.

Harley Davidson

You can put Harley Davidson logo on anything and sell at premium.

Problems	Why?
Excess Inventory	Your capital is tied up with inventory. Money today is better than money tomorrow
3% or 6% margin - better?	It depends. If 3% margin has higher turnover then it is better than 6% margin.

Cola Wars - Coca-Cola vs Pepsi

In old days, there was a pill clinical study trial

	Brand	Generic
Active	1	3
Placebo	2	4

Brand is a big thing.

Questions

1. What is Coca Cola brand worth? How do you calculate?

   • How much prices you can jack up with putting a logo on a product. Multiply that by your projected sales volume to get brand worth.

2. Why didn't Coca Cola used third party bottlers instead of building their own?

   • Bottlers had an expertise in marketing and distribution, which Coca Cola lacked. In 1980s, bottlers knew where to place ads and product. Coca Cola also has to build brand reputation because that time people didn't know about the market. It's a way of identifying who has skills.

Coca Cola Challenges

Challenges	Why?
Very low barrier to entry
Substitutes	They bought a lot of company which were in substitute business or they launched their own

Comments

1. Because of Coca Cola and Pepsi war, all other cola companies went out of business.
2. Whole world is becoming Walmartify.
3. Bottlers had distinct boundary