Home Video Games, Toyota and Walmart
I decided to combine these three cases into one blog post because while the messages delivered by each of these cases were powerful, they were simple and succinct.
The most important thing I remember from this case is THE NETWORK EFFECT. In any ecosystem, this can be a game changer. While it is difficult to kickstart, it can be done using the correct incentives. Once the network effect takes off, the business grows at a very rapid pace since the supply and demand feed each other in a seemingly infinite loop. Microsoft sold X-Box gaming consoles at or below cost because they realized that they needed to get consoles in place for game developers to develop games. If people had consoles, the games would come. Once exclusive Microsoft games like Halo were developed, customers had to have an X-Box to play them. This incentivized developers to develop more games. You can see how this continues on. This concept of network effect also worked for the prior UBER case I wrote about. The more people drive, the more readily available the rides incentivizing more people to use the platform. This in turn creates more demand for Uber drivers and so on. Take some time to think about other businesses where this holds true. There are plenty.
The most important thing about Toyota was that their rent yielding factor of production was their production strategy as well as their supplier management strategy. In essence, Toyota thrived due to its operational strategy. They empowered all factory workers to stop the assembly line if they were not happy with something. This allowed for the dual advantage of not having a quality flaw in the finished product as well as the immediate learning from the issue. What we now call the Lean manufacturing model was pioneered by Toyota but in essence, it was nothing more than empowering employees and increasing operational efficiency by not only sharing their expertise with suppliers and partners but investing in them financially and taking a minority stake in them so that their fates were tied to each other. This would enable complete trust from both parties in the relationship. The principles, while simple were also detrimental.
Walmart – A company that killed not only small businesses but small towns in America. Walmart is the king of the economies of scale and scope. The strategy was simple. Build a store so big and all inclusive that it not only prices out competition from small businesses but also makes it economically unviable for other large stores to try to compete. Basically open up a store accessible from 3 different small towns where people from all 3 towns can buy just about everything they need in one place and for much cheaper than anywhere else. Meanwhile, make sure that the population of the 3 towns combined is small enough to where another company would not want to invest in building a store since gaining a 50% market share would still not make the investment financially viable. Hence Walmart builds a monopoly in each location it operates in. Location was the most important piece of the Walmart strategy. The second most important piece – the logistics. Own your own fleet of trucks that caters to your specific location strategy. Especially since the locations will be rather remote and unique to the needs of Walmart. Together, this strategy seemed insurmountable and enabled Walmart to become the largest company in the world by revenue – a record it holds to date.
Overall this Strategy class left me wanting to continue each discussion further but there was only so much time in each class and the concepts we needed to cover almost always left me with hunger for deeper discussion. Feel free to post comments or subscribe to the blog and we can continue the conversations.