Competitive Strategy and Microeconomics with Charles Hill

This course was probably one of the best courses I have taken in my entire life. Charles Hill is the king of the socratic method of teaching. His ‘in your face’ and ‘you-yes you’ teaching style – while it made a lot of my classmates uncomfortable, kept my dyslexic brain on its toes. There was not a modicum of room for my mind to wander off into La la land. While I knew that supply and demand drove the price of just about everything in the world and vice versa, the only elasticity that I knew about before this class was that of metals and other objects that I had studied during my Bachelors and Masters in Mechanical Engineering. Charles taught us about how petroleum was mostly price inelastic – (meaning that the change in price will not affect the demand quite as much since people still have to go to work). However, a particular toy could be very price elastic – (meaning, if the price increases, most people will just buy their kid a different toy). While the quantitative learnings on microeconomics were quite interesting, the real zinger on this class was the cases that taught about strategy. I will distill my learnings from each case in a paragraph.

Airborne Express – The Underdog

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This was my very first case in my MBA journey and I did not know what to expect. I went in with a lot of preparation since the legend of Charles Hill most certainly precedes him. I had a timeline of events built out, but Charles didn’t really care for those details. Strategy is about choices. Strategy is about separating yourself from others so that you can compete on your own terms. This case is also one of my favorite and memorable cases of B-School because this was a company that made a strategic misstep that ended up driving it into an abyss. Management failed to acknowledge this error and executed the flawed strategy exceptionally. Airborne projected that it would be more lucrative to only carry business packages since the drivers would only have to stop at a few spots and could collect multiple packages at each stop. This would lower collection times and hence the overall costs. What the management failed to realize was that they were handing over a lot of pricing power to a few large customers in the process. Before long, the customers started exerting said power and Airborne had to choose between losing customers or cut costs by becoming more efficient. They chose to cut costs by becoming more efficient and this, Airborne executed better than anyone in the industry. Their cost per package per pound was unheard of and simply incomprehensible to anyone else in the industry but it was a result born out of a do or die situation for Airborne. This was the perfect example of a bad strategy executed extremely well.

There was also a story within the story that also provided some good lessons for me. DHL wanted to make a big splash in the US market so they decided to buy Airborne. The largest global freight career purchasing the most efficient US carrier seemed like something of a fairytale. However, DHL dumped $1 billion (Yes!! with a ‘B’) into Airborne and immediately started tinkering with the Airborne way of doing things in terms of operations. BIG MISTAKE. When you have a formula that is working better than anyone else in the industry, you might want to be more deliberate in what you mess with. After the miserable failure, DHL wrote off their Airborne acquisition just like Microsoft did with Nokia. The lesson here being, culture is a tricky thing. Something to pay a lot of attention to in terms of mergers and acquisitions.

Cola Wars

 

This case combined concepts from strategy, economics and game theory. Another American classic that talked about the cutthroat competition between Coke and Pepsi. The branding of Coca Cola as the all American beverage since Coke was the drink of the GI’s during the war and its rise in popularity after the war even though Pepsi beat coke in a blind taste test. Pepsi then coming up with the Generation Next campaign to appeal to the next generation as the GI’s were getting old and the price war that followed. This weaved in a lot of the microeconomics and game theory concepts where all the economic rents were competed away due to price wars and the consumer benefitted tremendously.  In a bid to find those higher than normal profits, Coke creates the Diet Coke and that allows them to raise prices again. The discussion talked about the example of price wars within the breakfast cereal market where the CEO of one of the brands tacitly signals to competition on an earnings call that they will not lower prices any more since that hurts the entire industry and the very next day, competition further lowers their price. This represents the dominant strategy in this prisoner’s dilemma.

The Coke and Pepsi conversation also brings the very first mention of the ‘Rent yielding factor of production’. A concept that has been ingrained in my character since the first time I heard it. Its the eternal pursuit of that one thing that differentiates you from competition. It is the reason people come to you or buy your product as opposed to your competition allowing you to generate higher than normal profits (aka. economic rents). For Coke and Pepsi, it is the brand which means they have to heavily invest in maintaining the perception of the brand – hence every other commercial on TV or a movie theater includes a Coke.

 

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