(1) Pillar: Something that supports, an important and basic part
The pillars of the economy are manufacturing, retail, and finance.
(2) Liquid Asset: Cash and other assets that can quickly become cash
Liquid assets are very important in acquisitions because they can be used to buy stock.
(3) On behalf of someone: For someone
All of our actions need to be on behalf of the customer. They can’t be for someone else.
1. Jeff Bezos says “your margin is my opportunity.” Let’s say you’re selling something for $5 and it costs you $3 to make it. What will Amazon’s price be?
2. How does Amazon innovate?
a. By thinking about low prices
b. By thinking about the customer
c. By thinking about margin
3. What does it mean for something to be an article of faith?
a. You just believe it. You don’t worry about evidence
b. You worry about it before anything else
c. You believe it and try to make others follow you
By Jeremy Schaar
In today’s lesson you’ll learn about Amazon’s strategy. You’ll study a few quotes from Amazon’s CEO Jeff Bezos. You’ll learn some vocabulary and some strategy theory.
A Quick Overview of Amazon’s Strategy
Amazon is the world’s most important online retailer. In ten years, they might just replace WalMart as the world’s biggest retailer. Their strategy has two pillars. First is to keep prices low. Second is to always focus on helping the customer. They constantly invest in new facilities and technology. They don’t worry at all about having cash on hand. Many people focus on Amazon’s net income which is always close to zero, but cash is just one asset. Non-liquid assets are growing at a remarkable rate.
Here are some great quotes from Amazon’s CEO Jeff Bezos:
Commitment to Low Prices
“There are two kinds of companies: Those that work to try to charge more and those that work to charge less. We will be the second.”
“Your margin is my opportunity.”
“We’ve done price elasticity studies, and the answer is always that we should raise prices. We don’t do that, because we believe — and we have to take this as an article of faith — that by keeping our prices very, very low, we earn trust with customers over time, and that that actually does maximize free cash flow over the long term.”
Staying Customer Focused
“We innovate by starting with the customer and working backwards. That becomes the touchstone for how we invent.”
“If you’re long-term oriented, customer interests and shareholder interests are aligned.”
“When [competitors are] in the shower in the morning, they’re thinking about how they’re going to get ahead of one of their top competitors. Here in the shower, we’re thinking about how we are going to invent something on behalf of a customer.”
(1) Implication: Things that become true because of something else.
The implications for an improving economy are probably more jobs and higher profits.
(2) To make a case for something: To argue something is true.
We made our case for expanding into Japan, now we need to see if they’ll accept our proposal.
(3) Default device: The device people will use when they’re unsure or don’t get to make a choice
The default device for calling people is still the phone, but it might become the computer.
1. What is Microsoft’s new strategy?
a. To make the best hardware in the world
b. To make the best software in the world
c. To make the software and hardware for their devices really good
2. What does it mean to leverage a relationship?
a. To use an existing relationship to do something else
b. To expand the relationship you have with someone
c. To begin a new partnership
3. How might Microsoft leverage its corporate relationships?
a. To sell tablets to corporations
b. To make tablets more entertaining
c. To sell tablets to the public
By Jeremy Schaar
To quickly review, Microsoft’s previous strategy was to only sell software. Everyone wanted the same software, so they could charge high prices and everyone would pay. They didn’t make hardware because all the hardware was basically the same. It was a commodity and not very profitable.
Things changed for two reasons. First, hardware isn’t a commodity anymore. For example, there are significant differences between an iPhone and a Galaxy Note. Second, Google now gives away Android for free.
Therefore, Microsoft is now trying to copy Apple and make the best software/hardware bundle. They hope people will buy their devices because their hardware and software are so good.
Will this work?
It will be hard. Apple and Samsung are already great. But here’s a case for how Microsoft succeeds.
First, note that most people use their tablets for entertainment–not for work. Apple and Samsung understand this, so their tablets are designed for games and web browsing more than productivity. They don’t really try to sell tablets to corporations. The Microsoft tablet is different. Microsoft emphasizes that you can multitask with it, you can use Microsoft Office, and it has a nice stand and keyboard.
Imagine that the Microsoft tablet therefore becomes the default device for businesses. In fact, Microsoft is still very profitable because of its corporate accounts. (Many people download illegal versions of Microsoft Windows, but corporations still pay.) Microsoft can leverage those existing relationships to sell their tablets. Then, when office workers are all using their tablets, they’ll be able to expand to the general public.
With the strategy decided, it becomes a question of B2B marketing. It will be fascinating to watch how well Microsoft succeeds.
(1) Proactive: To do something before you need to
I want you to be proactive. Don’t wait for me to tell you what to do.
(2) To align: To get people to feel the same way
We need to align the marketing and production teams.
(3) To harness: To use something for your advantage
We’ve harnessed our strong technical background to build a cool mobile application.
1. What is Booz and Company’s “Fit for Growth Index”?
a. The ways a company can align strategy
b. A score for how likely a company is to grow
c. The ways a company can grow
2. What’s the key point about spending?
a. Cut waste
b. Spend on underfunded areas
c. Spend on the stuff important for success
3. Why might alignment be important?
a. You need the right people
b. You need the right skills
c. You need people to work towards the same goals
By Jeremy Schaar
In this lesson, you’ll learn some good vocabulary and how to tell if a company is ready for growth.
Have you heard about Booz and Company’s “Fit for Growth Index”? They’ve identified three things that are important for growth. They also created a way to score those things so that companies can get a rating that’s easy to understand. You can think of it like a company taking a test. Their formula is a little complicated. You can click on the picture above or on this link to read all about it. (You’ll need to register at their site first.)
Here’s how they describe companies that are ready to grow:
First, they create clarity and coherence in their strategy, articulating the differentiating capabilities that they will need to win in the marketplace.
Said simply: A company should understand well why they will succeed.
Clarity means clear. Coherence means that there are no conflicts. To articulate is to say. A differentiating capability is something you can do better than your competitors.
Second, they put in place an optimized cost structure and approach to capital allocation, with continual investment in the capabilities critical to success, while proactively cutting costs in less-critical areas to fund these investments.
Said simply: They should spend their money wisely. This means cutting money in unimportant areas so they can spend on the stuff that’s really important for success.
Optimized means best possible. Cost structure is how much they’ll pay for things. Capital allocation is where they spend money. Continual investment means they’re always spending. Capabilities are things they can do. Critical to success means really important for success. Proactively means before it’s necessary.
Third, they build supportive organizations. They redesign their structures, incentives, decision rights, skill sets, and other organizational and cultural elements to more closely align their behavior to their strategy, and to harness the collective actions of their people.
Said simply: Employees should be able to do the company’s strategy. This means having the right people and motivating everyone to work well together.
Supportive means helpful. Incentives are the things that make us work well. To align means to get people to think the same way. To harness means to take advantage of, to use well.
(1) Bargaining Power: This is your strength when negotiating.
The fewer competitors you have, the greater your bargaining power will be.
(2) To pay a premium: To pay extra for something.
For a special service, like fast shipping, we often pay a premium.
(3) Competitive challenges: The things that make it hard to do well
Competitive challenges change from year to year, often because of technological innovations.
1. What does it mean for Microsoft to sell software independent of hardware?
a. The software price higher
b. Microsoft doesn’t sell hardware, just software
c. Microsoft bundles hardware and software together
2. Why does it matter that hardware isn’t a commodity anymore?
a. People won’t buy Windows if the hardware is bad
b. Windows needs to develop hardware that works well
c. Microsoft’s previous strategy was to guarantee good hardware
3. Why does it matter that Android is free?
a. It increases competition for Windows
b. Companies have no reason to partner with Microsoft
c. It will affect the price of Windows negatively
By Jeremy Schaar
Microsoft is still making lots and lots of money. So why does everyone talk about them like they’re a dying company? It’s because we can all see how they could fail. Last week, I discussed what made Microsoft so successful. This week, you’ll learn the two things that caused Microsoft to change its strategy. You’ll also learn what their new strategy is and you’ll learn some great strategy vocabulary.
That looks like a nice tablet, but why would Microsoft make it? Their strategy was to sell software independent of hardware. Microsoft let Dell and other companies sell hardware. They sold software because the hardware was a commodity, but everyone needed the same software because of network effects. (See last week’s lesson.)
Two things changed. First, hardware stopped being a commodity. The features on your phone and tablet matter now. So, if Microsoft wants to continue to sell Windows, it needs to come with awesome hardware.
But why not just partner with a hardware producer like Samsung? They might not have the bargaining power they did before, but they could still sell a great operating system. The second thing that changed is that Google gives away Android for free. So why would anyone buy Windows?
The only possible solution is to be like Apple. They need to sell both the hardware and the operating system together. If they have the best combination, then people will pay a premium for it. This is why Microsoft had to buy Nokia.
So Microsoft’s new strategy is to be like Apple. I’ll discuss the consequences of that decision and the competitive challenges Microsoft will face in the future next time.
(1) Commodity: A product like sugar or oil. All sellers have exactly the same product.
The price of commodities is a good indicator of the overall economy.
(2) To bundle: To sell one or more products together.
In the 1990s, companies had to bundle Microsoft Windows with their computers. Otherwise, no one would buy them.
(3) Network effects: The ways things change when many people use the same thing
Network effects are the main reason Facebook is so popular. Everyone uses it, so you use it too.
1. Which part of a computer was a commodity in the 1990s?
a. The hardware
b. The software
c. The retail store
2. After initial development costs, how much did it cost Microsoft to continue producing Windows?
a. It varied greatly by country
b. Almost nothing. Copying software is free
c. Nearly 50% of their operating budget
3. How did Apple’s strategy differ from Microsoft’s?
a. They only sold software
b. They only sold hardware
c. They bundled hardware and software
By Jeremy Schaar
Imagine this situation. You want to sell lemonade. You need sugar and lemons. Lots of people sell sugar, so the price of sugar goes down. But only one person sells lemons, so the price of lemons goes up.
Today on the blog you’ll learn about Microsoft. You’ll learn the strategy that made them so successful. In the process, you’ll learn some great strategy vocabulary and be better able to discuss the strategy at your company.
Why was Microsoft was so successful in the 1990s? Because Microsoft was a lemon seller. They understood that the hardware of a computer was a commodity. The software, however, depended on network effects. It meant that the makers of computer hardware would have many competitors. But the makers of the software would have no competitors.
In the 1980s it wasn’t clear if Microsoft or Apple would win the computer wars. Apple had a different strategy. They bundled their software and hardware. The result was that if you bought a Macintosh computer, then you used Macintosh software. If you bought almost any other computer, you used Microsoft software. Because it was hard to learn new software and easy to share information if everyone was using the same software, Microsoft dominated.
And that was great for Microsoft. If you wanted to sell a computer, you needed Microsoft. Customers wouldn’t buy computers without it. This let Microsoft demand very high prices.
In addition, Microsoft was able to make an infinite number of copies of their product at almost no cost. Microsoft has had piracy problems over the years, but the ability to copy their software has basically been a huge competitive advantage.
So, what’s changed? I’ll answer that question next week on the blog.
In the meantime, think about your company. Do you sell lemons or sugar? Do your customers demand your product or is it easy for them to choose something else? Is there any way for you to use network effects to make your product more valuable?