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Sasin School of Management

You use your strengths to start building up capability in that area. I think we spoke about this previously, but if you think about the marijuana industry in Thailand — so it was passed very suddenly and very quickly during COVID because all the people that were supposed to manage the bureaucracy and regulations were not working. So it managed to be pushed through. But the interesting thing for me from the perspective of the marijuana industry was the day after the law was passed, there were shops everywhere selling huge amounts of marijuana. Where did that come from? People were prepared. People understood the opportunity that was coming and they jumped in. Right now, over the last few years, we have seen that many people jumped in too quickly without any plans or anything, and a whole bunch of shops are closing down. But you can't have a marijuana shop every block — there's too much competition. So the opportunity was there. And if you can spot the opportunity in time — weak signals — you can jump in.

Threats are one of the competitive pressures that are affecting you. Is the economy in crisis? Is GDP getting less? Changing customer preferences? External risk? If you're selling baby food or running a primary school, demographics are a real problem for you because there are fewer and fewer babies being born. So your market is narrowing if it's just in Thailand. You need to figure out what to do and how to respond to it. In the last ten years, over five thousand schools have been closed down in Thailand because there are just not enough children.

So these are the four things that you need to look at when you're looking at: what are your strengths and your weaknesses internally? And what are the opportunities you can take advantage of based on your strengths externally? And what are the threats that are affecting you because of your weaknesses or your positioning? These are all linked together. They're not separate entities that you need to look at or separate fun sets.

So how do you look at your internal strengths? Your internal strengths are made up of a few different things. A competence is something that you do well — an activity that a firm has learned to perform with proficiency. So if you have good financial resources and you manage your money well, a good brand name, cost advantages, an attractive customer base.

A core competence is not just a competence, but it's something that because you do it really well, it gives you an advantage over your competitors. A distinctive competence is even more narrow — a competence that is important, that you perform better than your rivals, which gives you a significant strength over your rivals. So a core competence is something that you do well, that is central to what you do. For example, if you are a manufacturer and you have a good process, that's a competence. If that manufacturing process is essential for you to produce it, then it's a core competence. If your manufacturing process is central to what you produce and also your process is better than your competitors, then it's a distinctive competence. So these are levels of advantage that you have depending on how you do things well.

A weakness is something that you lack that other people do better than you. There are deficiencies in tangible stuff like your physical resources, your finances, your organizational aspects, or your intangible assets. You may not have a good brand and you need a brand to sell well. Your competitors have better brands than you. Say, for example, you're trying to open up a restaurant and it's called Momo Hell instead of Momo Paradise. Nobody knows about it, so you can't use your brand to sell it. That's a weakness. It's something that you lack.

Then you have market opportunities, which are the things that are changing that allow you to take advantage of them based on your strengths. Opportunities can evolve into mature markets. Suddenly there's a new client base, a new part of the market that is coming in. Say, for example, in Thailand, you're a farmer that sells durian. Suddenly Australia, which has a restriction on durian, drops its tariffs. That's an opportunity. It's a new market that you might be able to take advantage of. That allows you to enter new product lines, new businesses, new arenas.

Then the threats can be divided into the normal course of business threats, like increasing competitors or new entrants, or they can be sudden death survival type threats. COVID was a threat for many different businesses and they had to figure out how to manage it. You need to identify threats to the firm and evaluate strategic actions to be taken to neutralize or lessen the impact.

So SWOT is the foundation for positioning your firm to use its strengths, to grab opportunities, and to shore up its deficiencies to reduce the impact of threats. SWOT gives you insight into your overall business situation. And it allows you to figure out whether your strategy is good or not, whether you need to change it. Because if your strategy is to go into the Australian market selling a candy, for example, but nobody in Australia knows you, then you may need to change your strategy to try and build your brand awareness before you enter the market, because you have a weakness of brand awareness.

The best practice is: you need to be specific. You need to prioritize the factors that have the biggest impact on your product. And you need to avoid generalities, connect the different quadrants, and be action-oriented. There has to be something that comes out of your SWOT that allows you to take strategic action.

This is an example of a bad SWOT: "Good brand reputation and customer loyalty, strong technology, limited market presence in some areas, growing market demand for our products, increased competition in the marketplace." It's very generic. It's very broad. It can relate to many different industries and many different businesses. What you need to be able to do is to be very clear. "Market leading brand, 47% recognition in your target demographic." That tells you exactly what it is and what you can do about it. That really helps you target — that starts telling you what you can do.

You may have discovered that there's a government infrastructure spending program that's just been launched in your core markets, and you might be able to take advantage of that. "New EU regulations will increase compliance costs by 3.2 million annually." That might be a threat because you might have to do things to address that. For example, if you look at the fish canning industry and Thai Union, they had a serious problem when suddenly the EU gave them a red notice because they were starting to focus more on human trafficking and those issues. And they had to do something in order to get back into that market because it's one of their biggest markets. You have to be able to see what the threats are and be as specific as possible about them.

Here's an example of a company and I'll give you an example of a SWOT. Semiconductor chips are the new oil in terms of our dependence on them. And one company pretty much has a monopoly nestled on the northwest coast of Taiwan. TSMC produces 92 percent of the most advanced chips in the world. It's one of only two companies that mass produces chips below 10 nanometers, the other being Samsung. A nanometer refers to the length of a transistor — tiny switches 10,000 times thinner than a human hair that control electric currents. One nanometer is equal to one billionth of a meter. The smaller the transistor, the more that can be crammed together. The more transistors you have, the better the chip and the more powerful your computer will be.

When House Speaker Nancy Pelosi visited Taiwan in August 2022, she made it a point to meet with TSMC Chairman Mark Liu, a sign of just how important the company is. Beijing spent weeks telling Pelosi not to go to Taiwan, an island that Chinese president Xi Jinping believes is a breakaway province and has threatened to invade. In light of Pelosi's visit, Beijing sanctioned Taiwan by suspending imports of citrus fruits and fish. Of course, Beijing did not ban Taiwanese semiconductors because it relies on them like everyone else.

Semiconductors have become a key part of the tech rivalry between the U.S. and China. There are concerns that an invasion of Taiwan by China could choke off the supply of these cutting edge chips to the rest of the world and give Beijing control of this essential technology. The fundamental technology was actually invented in America and gave Silicon Valley its name, as most chips are created with silicon. In the 90s, the U.S. manufactured a third of the world's chips. Today, none of the advanced chips is made in the U.S.A.

Companies like Intel used to build and design chips in-house. But beginning in the 1980s, American firms started struggling against competition from Japanese companies. So they outsourced some parts of their business that were draining their profits, including the expensive factories that produce semiconductor chips. Morris Chang noticed this trend and took advantage of it. He was born in China, and in 1949, he moved to the States where he eventually earned a PhD in electrical engineering from Stanford. He spent 25 years rising through the ranks of Texas Instruments before the Taiwanese government offered him a chance to develop its semiconductor industry. Chang realized there was a great opportunity to create a new company focused solely on making chips that could supply all needs. In 1987, TSMC was born.

Chang initially priced the chips at a loss to capture a larger market share in the hopes that costs would eventually be reduced enough to generate a profit. His strategy paid off big time. The world's largest companies all rely on TSMC: Apple, Intel, Qualcomm, AMD, Nvidia, Huawei, and Tesla.

Manufacturing semiconductor chips that are the size of a fingernail is crazy difficult. Each chip is packed with as many as 50 billion transistors. The process begins by cutting silicon wafers — thin slices of semiconductors that kind of look like shiny mirrors — into individual chips. Employees must wear protective gear when handling them. If even a speck of dust falls onto the wafer, the entire batch risks being ruined. The chips are made by etching tiny patterns across the wafer layer upon layer. To create the layers, the wafer is coated with a light-sensitive chemical. It's kind of like layering a cake, except in this case, the cake has 75 layers and takes three months to make. The layers are connected by copper wires that carry electrical power.

The entire process is daunting and TSMC has the undisputed edge. But things are getting complicated as it finds itself caught in the middle of a tug of war between two superpowers. In August, President Biden signed the CHIPS Act into law, which bans companies that receive American subsidies from manufacturing sophisticated chips for China — any that are below 28 nanometers. Washington is offering 52 billion in subsidies to encourage manufacturers like TSMC to build semiconductor plants in the U.S. One is scheduled to open in Arizona in 2024, which TSMC previewed on its LinkedIn page. But it will still represent only a small sliver of global chip production.

At the same time, Chinese chip innovation is growing by leaps and bounds. In 2020, Chinese firms were still struggling to get below 40 nanometers. Today, leading Chinese chip company SMIC has successfully made a seven nanometer chip. Researchers at the firm Tech Insights say the chip was made for crypto mining. China has made it a strategic priority to boost its domestic semiconductor industry, showering Chinese chip firms with incentives, including exempting them from paying corporate income tax for up to 10 years if they make the most sophisticated chips.

So for now, Taiwan Semiconductor is the most important chip manufacturer in the world. It's producing chips that are two nanometers smaller than China. Investors start manufacturing ultra-advanced two nanometer chips by 2025. That means your iPhone would last four days without needing a charge. China needs TSMC just as much as the United States does. As geopolitical tensions rise, Taiwan Semiconductor's importance on the world stage may be the island's greatest protection against any possible invasion.

[Professor to class] So based on that video, what would you say a strength of TSMC is? Very generic — technology is too broad. What's a strength?

[Student] It's the three nanometer chip. The very smallest.

[Professor] So one of its strengths is making the smallest chips possible, smaller than anyone else. That's a key strength. And it's a core distinctive competence because nobody else can do that.

[Student] I think they have the market also, because the majority of the market already buys from them. They have the scale of the biggest market share.

[Professor] 60% of all chips and 94% of the smallest chips — seven nanometers and below, 94% of that market, one company in Taiwan. It's crazy. What else?

[Student] I think one of the advantages is government backing — strong government support.

[Professor] Although if you listen to Morris Chang, he'll say the government didn't invite him to do anything. He came with the idea. They gave, I think, 100 million, but actually what it cost was several billion to get it started. So they were a seed funder. It's the same as in Korea with the K-pop movement — the government always takes credit for all of this stuff, but it's often people within the industry that actually make it happen. So what might be an opportunity for TSMC?

[Student] Maybe AI technologies, because nowadays you need chips for advancing technology.

[Professor] Yes, you need smaller and faster and more energy efficient chips, and they are on the cutting edge of that. So that's a big opportunity. A threat — that should be an easy one, right?

[Student] The fact that SMIC is now making chips that are coming close.

[Professor] So yes, SMIC is now making chips that are coming close — that's a big threat, because they may not have the monopoly on those small chips. What else?

[Student] Maybe geopolitical conflict with China.

[Professor] They have a very weird relationship with China. But the problem is that America is pressuring them not to sell to China the smallest chips. And China is saying, you need to sell to us because you are part of us. So there's a big conflict happening with much more powerful forces that might affect them.

[Student] I think there is a problem about reducing thinner and thinner chips, because there is a limitation. China is going ahead.

[Professor] So what I was saying is that China's becoming closer — that's a threat. But in addition to that, they may be coming to the point where they cannot make it any smaller because of the complexities. It's more complex to make less and less small. So they may come to a point where they can't do much more. And then what? How do they keep ahead of the market? And that may be to do with design.

So strength: controls 50 to 54% of the global foundry market. What does that mean? They sell 54% of the chips that are used in everything — not just computers, but cars, refrigerators, air conditioners, anything that needs a chip. How does it manage to control that? What do you think gives it that market position?

[Student] They make the chips. Everyone else can design and send it to them. They can make it. They don't want to take over anyone else's business.

[Professor] They know where they are in the value chain, and they strengthen their position in the market. Because they're a pure play foundry. Apple is 25% of their sales, which is a strength as well as potentially a threat. They had the first mover advantage as the world's first dedicated semiconductor foundry.

Weaknesses: well, they're based in Taiwan. It's a geopolitically fragile space. Makes it difficult for them. They have an acute dependence on energy imports and limited stockpiles of essential materials and chemicals. What do you need to make semiconductors? Silicon, which comes from sand — but a certain type of sand. In fact, I read something about Australia selling sand to Saudi Arabia. It's quite a weird thought, because you'd think Saudi Arabia has more sand than anybody else. But it's the wrong type of sand for construction. So they have to import their sand. A specific type of sand. But also gold — gold is a major material in chip manufacturing, because it's one of the best conductors there is. Which is why there are companies that focus specifically on extracting gold from old computers and other electronics. It's cheaper than actually digging for new gold.

They have financial planning inefficiencies and so on. And their market share in emerging regions remains less than one percent. Why? Because markets like India are not focused on buying the smallest and fastest stuff. They can buy stuff that's a few generations older and still supply their economy.

Opportunities: yes, AI. The global semiconductor market is growing. The automotive sector is growing. Does anyone know how many chips are in the average car these days?

[Student] Three chips to control the steering?

[Student] Two hundred?

[Student] A thousand?

[Professor] About one hundred and fifty different chips are used for different parts. Three to one hundred and fifty is quite a jump to two hundred. It's somewhere in between. So healthcare semiconductors and the market in Asia Pacific will grow.

But threats: escalating China-Taiwan tensions, U.S. export controls, Samsung Foundry competition re-entering the business, and China is starting to close the gap. And there are significant cybersecurity risks always with companies like this — that people can hack in.

One of the interesting things is market saturation in smartphones, with shipments declining in 2022 already because everybody already has a fast enough phone. How much faster do you need it? How often do you change your phone? Does anyone change their phone every year? Apple brings out a new model every year. Samsung brings out a new model every year. Anyone change it every two years? Three years? Around every three years. I usually wait four or five years because actually, I try and get the latest one when I buy it and then I wait a few years because I don't need much else. So there's a saturation in the market.

So what I would like you to do — I've tried to restructure this to make it a little bit quicker because we have a lot to cover. We're not going to do a full SWOT. I'm going to give you the statements that you can put into the SWOT.

Since entering rehabilitation, Thai Airways has done really well in the last year. They have gone into significant profitability and they manage pretty well. It's rebuilding its network, modernizing operations, but it faces significant competition, shifting customer demands, and so on. So I'm going to give you 16 statements about Thai Airways. In your groups, go to one of these flip charts and try and place each statement into one of the quadrants. Is it a strength? Is it a weakness? Is it an opportunity? Is it a threat?

After you've done that, try and select what you think is the most important strength — one or two strengths — what is the most important weakness, and potentially the biggest opportunity or threat. And decide: what would you recommend to Thai Airways for the next three years based on your SWOT? SWOT has to result in action. So these are the 16 statements. You can just put the number in, but get your flip charts, do a little SWOT diagram, and then just place the numbers in the right place. And let's see if everyone gets it the same.

[Professor] Okay, time's up. I'm going to ask you to shout out. Let's do this quickly.

Number one: strength. Number two — "historically carried a higher cost structure" — weakness. Number three — "growth in international tourism" — opportunity. Number four — "volatile fuel prices" — threat. Number five — "membership in Star Alliance" — strength. Number six — "aging fleet" — weakness. So you can see what's internal and what's external. Number seven — "growing demand for premium travel" — opportunity. Number eight — "intense competition from other airlines" — threat, because it's external. Number nine — "direct access to Bangkok" — strength. Number ten — "large debt" — weakness. Internal. They owe the money. It's their financial weakness. Number eleven — "increased use of AI automation and digital technologies" — opportunity or strength. That's an interesting one, because if they are increasing their use of AI automation to improve these things, it may be something that they're doing well — that may be a strength. But if it's just everybody's increasing, then it's an opportunity. Number twelve — "economic downturn" — threat. Number thirteen — "strong national identity" — strength. Number fourteen — "government regulations that are increasing pressure" — threat. Number fifteen — "dependence on tourism-related travel demand" — weakness. Number sixteen — "opportunities to expand partnership" — opportunity.

So I'm going to ask a couple of groups. What's the most important strength that you found?

[Student] Number one — brand. Brand is their biggest strength.

[Professor] Would everyone agree? Yes. Did anyone have something different? Number nine — direct access to Bangkok as a major regional hub. Yeah, that may be the most important strength because Thailand and Bangkok specifically is a regional hub for so many things. So can you see that you may come up with different approaches and different ideas of what's prioritized?

How about their biggest weakness?

[Student] Number ten — debt.

[Professor] So debt would be the biggest weakness. Does everyone agree? Because the financial organization — you need cash flow, you need profitability. It's a challenge. It affects how they can perform and build for the future.

How about the biggest opportunity?

[Student] Number three — growth in international tourism in Thailand. [Another student] Number seven — growing demand for premium travel and business class experiences in Asia.

[Professor] So growth in international tourism to Thailand may be an important thing, sure. But many other airlines can also take advantage of it. Whereas if Thai Airways is positioned to be a premium airline and competing against the lower cost and less well-known airlines, then maybe the premium travel and business class experience is the one. So think about what it can do about it. If you're just looking at growth in international tourism, yes, they can have more flights — but so can other people. But premium — they may be in a better position than others to take advantage of that. So I would probably lean towards seven being more of a priority than three, even though they're both opportunities.

How about the biggest threat?

[Student] Number eight — intense competition.

[Professor] So competition is the biggest threat. The one thing I would say about competition is that generally competition is covered under Porter's Five Forces — an external thing that's happening to you. So yes, it might be a threat if it's getting more intense. But generally, I would not really include it as a threat because it's something that you would expect. Unless there's a significant change in rivalry or competitiveness, I wouldn't include it as one of these things because competition is a standard factor of all industries. But if it's changing — if your rivals are lowering prices, there are price wars — that may be a threat. So generically, competitiveness is not a threat, but specific aspects of competition may be a threat.

And the final one — what would you recommend?

[Student, jokingly] Quit.

[Professor] Well, they've just recovered. They can't quit now. They're running down again. It's always the politicians that get into the board, right? Anyone else can suggest something more optimistic?

[Student] Okay, so they continue to —

[Professor] So do you think they should increase the amount of seats that they have in premium and business class and reduce the number of seats that they have in economy class? They have premium economy, right? So growing demand is an opportunity. But what I'm asking is: what should they do about it? What's your recommendation? So you can say "just do the same thing," but that's not really doing anything once they spot an opportunity. So now they know that there's growing demand for premium travel. What would you tell them to do? Would you tell them to change their fleet of aircraft?

[Student] Two things. The first one would be to restructure the debt. Second one would be to selectively increase the routes.

[Professor] So that's very clear. Restructure your debt to try and reduce the threat of your financial weakness. And routes — what would you say they need to do with the routes? Change them? How?

[Student] About the opportunities on the premium routes, and also the travelers. We are the travel hubs. So instead of just going everywhere, try to capture the travelers that would like to go to —

[Professor] So this has been a general problem with Thai Airways — they try and get as many routes as possible. But actually, I think that is right. They should focus on the routes where they can leverage the premium and business class travelers, and reduce their use of other routes and drop them, because every route costs them money.

[Student] And hedging against fuel prices, like Southwest did.

[Professor] So hedging against fuel prices because of the concern that fuel prices will go up. So that may be something that they could do. You think that's the most important thing they should be doing?

[Student] It's one of them.

[Professor] Okay, so for the next three years, they should be hedging their fuel prices. So can you see how SWOT leads to action?

[Student] I have a new idea — just a food delivery from the first class. Why do they see themselves as an airline? That's one of the strengths — they represent the Thai authentic. So they can diversify. Can you do that while they're dependent on tourism? During the low season or low tourism in Thailand, what would you suggest they diversify into?

[Student] Maybe more food, or fashion.

[Professor] Well, yes. In fact, the reason most airlines survived during COVID was because even now the bulk of their revenue comes from cargo and carrying high value cargo like gold and perishables. So change into a cargo airline? Maybe. But there's a lot of competition in that sector. So they've got to evaluate — is that the right thing to do if they want to compete effectively with people like DHL, who has a whole fleet of cargo airlines? So, yes, diversification may be an option. During COVID, their staff was selling Thai Airways patongo to survive. Is that the right way to go? Maybe, maybe not. You've got to think: is food production a real strength of theirs? They don't produce the food — it's all SkyChef or some other company, outsourced. It's not necessarily a core capability. So I wouldn't recommend that because they don't know how to make a good food supply chain. We've got to think: what are they really good at? And that's where we need to consider it.

For example, if you think about the transport sector — there was a bus company that went into EV taxis recently in Bangkok. Smile Bus was the bus brand and then they moved into EV because, I think, what they felt was they could provide a good transportation option in a different sector of the transportation market. So maybe that's what Thai Airways could think about doing. It may think about dropping regional flights because there are too many low cost airlines and focus purely on long distance, whatever it is. And each of these decisions would affect how they use their money and how they set and prioritize strategic actions. That's the basis for a SWOT.

Now, when you are looking at your SWOT, you have to look at your strengths and weaknesses in relation to your resources and capabilities. What are the company's most important resources and capabilities and will they give you a lasting competitive advantage? They determine your competitiveness and your strategy depends on these to deliver results.

The differentiation between resources and capabilities: resources are tangible and intangible assets. They are usually things that you can measure and see quite clearly. Capabilities are things that you do better than other people.

Tangible resources are land, real estate, equipment, airplanes, financial resources, the amount of cash you have, the amount of credit you can get. Technological assets are your IP that is patented, innovation technologies, processes. Organizational resources are your IT and communication systems and your organizational design and reporting structure.

The intangible stuff are your human resources — what are the skills that people have in your organization that you can use to do things better or faster? Your brand, your company image — even though brand has market value, it's not something that's easily measurable and it's not something that's easily sold or transferred. A patent you can sell to another company. But brand, you cannot really sell to another company. It's inherent in what you are.

The relationships you have, the partnerships, the alliances, the company culture is a core part of it. The norms of behavior, how you do things, the beliefs, the purpose, the attachment of your staff. Are they committed to your company? Are they giving you discretionary effort that they wouldn't give at another company?

Then capabilities. So those are resources — tangible and intangible. Capability is the ability to perform the critical activities of your company proficiently using a related combination of your resources. A resource bundle is a linked and closely integrated set.

What does that mean? Amazon's organizational capability is demand forecasting based on all the data that it collects. It has some of the best predictive analytics, which is why when you buy something on Amazon, they already know — oh, you might like these things as well. Not just based on what you buy, but based on what other people that have bought this thing can tell you. They have dynamic pricing, they have sales, but they also have an exceptional supply chain optimization. And that is a capability that they use their robots, their distribution facilities, and everything. They use all of those together to build that capability.

If you look at SpaceX, they have a resource bundle in the space exploration space. They have advanced rocket technology, reusable rocket stages — something that nobody has done before. That's an asset they use as a resource bundle: in-house manufacturing, rocket landing and reuse. And they also have Starlink that they can use. So that's a bundle of resources that gives them an organizational capability.

I don't worry too much about the definitions of these things. But what I want you to think about is: what are the things that an organization can use to be better than its competitors? Some of these things are tangible, some are intangible, and some are processes that allow you to use these tangible and intangible things in a better way than your competitors might be able to do.

So going beyond the organizational, dynamic capability is really your ability to adapt to the external environment and use your capabilities and your resources in a shifting way to take advantage of opportunities that happen.

If you think about Grab, they started out as ride sharing. That was their original focus. But they grew into a super app because they saw the gaps in food delivery, logistics, and financial services. And they took advantage of that. Using the data that they started building up with their ride sharing and then with their delivery, they are constantly evolving their capabilities, investing in AI logistics, optimization, local partnerships, and so on. So they have an ability to shift with the opportunities and threats that come up. They know how best to use their capabilities.

So I want you guys to think about: what are these capabilities and resources that your company has? And one of the ways to assess their value is this VRIN test. Is what you have valuable? For example, the fact that TSMC can produce three nanometer — that's valuable because nobody else can do it.

Is it rare? Yes. Three nanometer — also rare. Nobody else can do it. But it's something that people are catching up with. However, deep customer integration is rare because it takes a long time to build up and you can't just transfer it or copy it very easily.

Inimitable — is it difficult for people to copy? Their process knowledge, their customer relationship capital, and their manufacturing ecosystem — very difficult for people to copy.

And is it non-substitutable? Yes. Nobody else can make these things. They cannot be substituted. Everybody needs semiconductor chips for many of the things that we use in technology today.

So you've got to think about: are these things valuable, rare, inimitable, and non-substitutable?

Toyota's delegated decision making in terms of their process — that is something that is valuable because it helps them produce better. It is rare because they tried to give it to Ford, but Ford didn't even know how to use it and couldn't copy it. And it's non-substitutable. Their process cannot be substituted by machinery or anything like that. It's something that is built into the capability of their workers.

IKEA customer outsourcing — who else does that? They've outsourced the final assembly of their furniture to their customers. If anybody else tried to do that now, that's just being cheap or copying IKEA. And you're not IKEA. They have built a process that allows them to outsource the last piece of assembly to customers.

The Peninsula as a customer-focused service business — their focus, one of the things that they talk about, is employees first. Not customers first. Weird for a hotel. Employees first. We focus on our employees. We make sure that they are great in their jobs and they're happy where they are so that they can give our customers the best service possible. It's an interesting twist on how they do things.

A friend of mine did some work with them many years ago helping them try and understand how they can improve the customer experience through their employees. He's actually a learning designer and a learning consultant, but he also develops and designs processes. He went in there and they spent three days interviewing people, walking around, exploring the hotel. And he came up with two recommendations for the hotel in order to make customer service even better than it already was.

I mean, most of these five star hotels — their service is already really great. How do you make it better? How do you make your employees want to give the best service possible? That it's not just part of their job, but it's part of their passion. Any ideas what you might do if you were trying to make employees more committed to the organization's focus on customer service?

[Student] Give them shares.

[Professor] Yeah, sure. Shares might be a thing. Some companies do that. But it's very expensive. What might you do that doesn't cost a lot of money?

[Student] Maybe set a KPI or performance target.

[Professor] Okay, so set KPIs with incentives. Sure, you can do that. But many people do that.

[Student] Maybe they try to understand their life. Yesterday we had HR training, an HR workshop at Sasin. They talked about how we can align employee goals to company goals, and can help them engage with the company better.

[Professor] Sure. That's actually very close. So the two things that they recommended were:

Firstly, when you walk into a Peninsula hotel, like any other five star hotel, what do you experience when you walk into the lobby? It feels lovely. It feels luxurious. That's what you want your customers to feel. But if you're a staff member and you go in the staff entrance, what does that look like? There's boxes everywhere. Things are a bit messy. It's the back door. Back door is never as good as the front door. He said, make the back entrance look like the front entrance. So when your staff walk in, they feel like they're walking into the Peninsula. Doesn't cost very much. But make it feel like the experience that your customers get.

And the second thing he recommended was: offer every new employee one night at the hotel. They can stay in a room. They can feel what it's like. And they can order room service, do this, do that. And, you know, when I think about it — I can see it in my office. I have a little dustbin where I can put papers under my desk. But the cleaning service always puts the dustbin really far in. I have to drag it out. Now, if the cleaning service actually sat at my desk and did some work there and tried to throw something away, they may realize something as small as — oh, I should move the dustbin a little bit closer to the front. So it's really just those little things that can make a huge difference in how your guests experience your hotel. Because now your employees know what they should be experiencing. So just two things. And these processes are valuable, rare, inimitable, non-substitutable.

The competitive power of a company's resources and capabilities should relate to the total economic value produced by the cost — the value that the buyer perceives minus the cost. That is the amount of value you're producing. Now, remember, if you look at the value stick — the value that you're creating is that minus this. The value that you're capturing is that minus this. So you are creating value, but you're not capturing all of it. And that's okay. Because every participant in the value stick needs to get value in order for that value stick to work. If you priced right up at the top near the willingness to pay, your customers will not see the extra value that they will get from buying your product. They have to see that they are getting value for themselves from paying for it. If it's purely transactional — you get exactly the value that you pay for — then they won't keep coming back. So you've got to make sure that you can provide that.

Your superior resources and capabilities should allow you to produce a competitive advantage with significant profit potential as well as creating more value for your customers. Never make the mistake of trying to push your costs so low that you hit your supplier surplus, because there will come a time very quickly when your suppliers cannot maintain their own profitability and value because they're not getting value from your relationship. And never push your price up so high that your customers don't feel like they're getting value. Everybody should get value. But if you're using your capabilities correctly, then you can produce a sustainable competitive advantage and keep your profit margins high. The best way to keep your profit margins high is to make sure that your customers' value proposition is high and your suppliers' value proposition is high as well. So all three of those little spaces need to grow.

So how do you figure out where your strengths fit in your organization and in your supply chain? This is where we'll do a brief analysis of a value chain. A value chain is basically the steps that an organization takes in order to produce and deliver its product or its service. The primary activities and related support activities that create customer value. They identify the inner workings of the firm, and your business model gives you a deep look at where you are spending money and where you are building value. And it reveals the emphasis that a firm places on activities that enhance differentiation and support higher prices.

So you have different extents of value chain. You have your internal value chain from the time the materials come in to the time the final product goes out. But that internal value chain is only part of the broader value chain of the industry, which includes your suppliers and so on, as well as whatever the people that your customers are using your product for. Now, sometimes you may be really right near the end of the value chain if you are making ice cream that is eaten by customers immediately — basically, your customers are the end user. But if you are like TSMC that is manufacturing computer chips, you are nowhere near the end of the value chain. You're selling those semiconductors not to the final consumer, but to manufacturers of computers, of cars, of whatever. And those go into either businesses that allow them to be used for other things or to the final end user. So you've got to know where you are in the broader value chain.

As I said, you need to manage the costs and profit margins of suppliers and channel partners as well to make sure that everyone is doing well. If you look at a representative value chain: suppliers, the company's own value chain, forward channel (sales and distribution), and the end user. Internal value chain: supply chain management, operations, distribution, sales, marketing, service, profit. This is just an example. Supporting activities would be technology and systems, human resources, general administration. Sometimes product R&D would be part of your value chain. If you are a pharmaceutical company that's creating new medications, then that would be part of your value chain, not a support service. But for some companies, it may just be part of their support services.

Your core competencies should fit into these areas so you can clearly see where you are adding value and where you are extracting value. And you should be focusing on the parts of the value chain which help you differentiate. So Toyota would be focusing on its operations — that's where it gains the most value from its process. A bank may be focused on service to build wealth management partnerships, or if it's focusing on retail management, it may be focusing on sales and marketing. Manufacturing, you'd be looking at operational efficiency. Brands would be looking at sales and marketing. Tourism might be looking at how well you do service. Banking — again, relationships.

[Professor shares Jim Thompson value chain example]

If you look at Jim Thompson's value chain — high still, premium, not luxury but premium. I don't think a Jim Thompson scarf costs as much as an Hermès scarf — probably about a third. If you look at their value chain, inbound logistics, sourcing, and traditional Thai silk methods are getting fewer and fewer. So they have to hire and train and build those people. That's part of their operations. Marketing and sales is the story of Jim Thompson and Thai silk. Does anyone know what happened to Jim Thompson? I think people would like to know. Was it the CIA? Yeah, everybody thinks it's the CIA. And then service is customer education about silk production, repair and restoration services, and so on.

A value chain doesn't have to be very long, but you have to know which segments you are adding the most value. I would say that brand and storytelling is important and service is important. But one of the key parts of Jim Thompson is the fact that they maintain and grow the hand weaving process and the traditional Thai dye processes, which nobody else is really doing. So it's something that differentiates them significantly from other people. I can buy a proper Thai silk scarf for 150 baht at MBK. But it's not a Jim Thompson scarf. The design is not traditionally sourced. I don't know the history of where it comes from. The quality may not be as good. The dyeing process may not be as good.

So you check your value chain and it allows you to compare with your competitors. If you look at Apple's value chain — sourcing, design, manufacturing, logistics, retail, marketing, and service — you could say that design is really their strength because they don't do the manufacturing themselves. Foxconn does the manufacturing. Retail — they're pretty good at, because they have their Apple stores and so on. Service, I would say is significantly better than Samsung.

If we compare the two of them, where would you say Samsung is better and where would you say Apple is better?

[Student] Samsung is better in manufacturing. They produce their own stuff. They have their own factories.

[Professor] And where's Apple better?

[Student] Design.

[Professor] Design. And also R&D. They've started producing their own chips — Samsung also produces its own chips — so maybe it's not that much of a difference. But design-wise, Apple is way ahead. Because they focus very much on the design of their products, like the unibody shell for a MacBook Air, the lightness, the thinness — all of that stuff is something that they're far ahead on. That allows each of these companies to figure out: where do they use their resources most? If Apple understands that maybe manufacturing is not their biggest strength, maybe they need to build manufacturing. Or they may think: we need to invest far more in design to differentiate us from Samsung, because anybody can produce mobile phones and laptops. Nobody can design them like us.

So that's really what I wanted to talk about in terms of value chain. That covers the whole idea of internal analysis — but internal analysis in relation to what is happening on the outside in the competitive market and in the broader macro environment. This is the boring stuff of analyzing your own company, but hopefully you'll be able to do this far better if you follow the process that I've spoken about here.

I know I'm going very quickly because we have a lot to cover, but I just wanted you to get a good idea of how do you analyze internally? Does this make sense for you? Is there anything else that you think might be missing?

[Student] I think the strength of Apple in retail is the whole experience — the very good store experience that nobody can mimic or copy.

[Professor] I would say yes, in most of the world. But I don't know if you've been to China — there are complete fake Apple stores that sell fake Apple stuff, completely fake. Look and feel like the real thing. But yes, you're right. The retail experience in Apple is a really big differential. When you walk into an Apple store, it's not like walking into a department store or a phone shop that sells Samsung. So yes, it's a key differentiator. Great point.

Any other thoughts? Any other questions? Do you feel comfortable to analyze your own companies based on this and do a SWOT? Make sure it's not generic. Make sure you are clear on exactly what is happening in your company and where you are strong, where you are weak in relation to your opportunities and threats. You have to do all of them before you decide what are your strategic priorities. But in the end, after you do your SWOT, you have to decide what you're going to do with it.

So time for a break. Time for dinner. Any other questions? When we come back, we will now get into finally the five generic strategies. And you will start thinking about: what is your strategy? How do you make yourself different from your competitors? How do you compete? I'll see you in half an hour.

So for tomorrow's class test: it is going to be 20 multiple choice questions. 30 minutes. Pen and paper. No devices. No open book. If you fail, can you retest? Well, we'll have to talk about that.

Okay. So we have done the organizational analysis. We have looked at the macro environment. We've looked at the industry. We've looked at your company. Now, what do you do with all of that? You have to choose a strategy for your company.

The textbook by Thompson et al. talks about five generic strategies. This is not just their view — this is the broad perspective that there are five generic strategies that you can employ. But what you will notice is that one of them is quite narrow and one of them is very broad. So most of you will fall into one side of this matrix, and I think very few will fall into the other side.

So your strategy is about how you position yourself in the marketplace and deliver what your customers are looking for and therefore achieve a competitive advantage over your rivals. There are two dimensions that distinguish one strategy from another. The first is: is your target market broad? Does it take into account many different types of people or customers, or is your target market very narrow — one specific group of customers? The other thing is: do you pursue your advantage by trying to offer the lowest costs possible, or do you pursue your advantage through some other type of differentiation? Basically, it's: do you differentiate by cost or not?

So what this means is you have a differentiation — you have the narrow segments or market niche, or a broad cross section, and you have a focus on lower costs and a focus on differentiation. Some people will provide a low cost product or service to many different types of customers. Some people will differentiate and have many different types of customers. And we'll talk about differentiation in a lot more detail than we'll talk about costs because there are so many different ways to differentiate.

Some people may focus on costs but aim at a very specific market. And some people will focus on a specific market but differentiate in some way apart from costs. And in the middle, you have best cost providers. Those are people who offer what is considered good value. So it's not the cheapest, it's also not the most expensive, but it offers close enough in terms of features to the more expensive premium end of the market that people feel they're getting value. So those are the five generic strategies.

How many of you work for companies that focus purely on offering low cost product or service — that your competitive advantage is based on the fact that you can sell what you sell significantly cheaper than most of your competitors? Anyone? No, there was no one in the MBA class either. It's a very specific type of strategy that works well in certain parts of the value chain and certain industries, but not everywhere.

So before you define what sort of strategy you're following, you first need to decide: are you looking at your whole business or at a business unit? If I were to ask you to decide what strategy CP Group follows, you wouldn't be able to tell me because there are so many different strategies — CP All, CPF, Magnolia — very different businesses, very different. So you've got to decide which business unit or even which product you're focusing on.

You identify: is their target market broad, looking for most customer segments — everyone from wealthy people to poorer people, or everyone from across Southeast Asia? Or are you targeting a narrow segment — niche geography, niche customer type, narrow use case? That tells you whether you are broad or focused.

Then, are you competing primarily on lowest price, or with distinctive uniqueness, or a deliberate balance of value and affordability? So are you trying to offer people the lowest price, or are you trying to differentiate in some other way, or are you trying to offer value through differentiation?

The way to check this: if your price discounts disappeared, would customers still buy from you? If not, then you are probably focusing on a low cost strategy. If your distinctive features disappeared, would customers still choose you? For example, if you have an ice cream shop and you sell handmade ice cream, and then you start buying factory-made ice cream, would people stop coming to you? That's a differentiator. If you get rid of that, will people still come to you? If not, then you have a differentiation strategy.

And then underneath that, you need to look at what's the economic logic. Does your advantage stem from structural cost efficiency and scale, or from a higher willingness from customers to pay for your product driven by the brand or the ecosystem or whatever feature it is? Then based on all of that, you can tell which strategy you're following. You can articulate a precise strategic statement referencing the economic logic. "Company X follows a broad differentiation strategy in selling juice by winning primarily through high value pure fruit juice, targeting every customer that wants pure fruit juice rather than distilled fruit juice."

So here's your chance to decide what's what. Here's a bunch of brands on your flip charts. Turn over a sheet, create a little grid, and place the companies. Let's see how much we align and how much you align with each other. Any brands that you don't know? Grab a flip chart and do it. I'll give you five minutes. This is to get you up after you had dinner.

[Professor] So I am going to share with you where I put everything. I want to see: are there any disagreements? Because I can tell you that I have changed and moved stuff in the last couple of classes that I've had based on what people have argued.

[Professor shows classification grid]

Any major disagreements based on your evaluation? Okay. What about Primark? Where did you put Primark? Primark may be considered broad, low cost, but I think Primark has a very focused market of certain neighborhoods and suburbs where they sell to — a very specific socioeconomic group. Not generally — in the UK, a middle-class family who shops at Waitrose or Sainsbury's wouldn't go to Primark. They'd go to H&M or Zara.

[Student] It's compared to the market.

[Professor] Yes, that's a good question because remember: everything is about comparison. You could put it in focused, low cost. But the question I would ask is: if you look at the types of customers that get membership, do they come from different socioeconomic groups, different neighborhoods, different types of people? If yes, then it's broad. If it's only one group of people, then it's focused. The card is the business model, not the market.

What about CJ More? I saw you guys put CJ More at the top originally. But you moved it to the bottom. So why did I put CJ More in focused rather than broad? Well, because if you think about where it competes — it competes in the relatively rural second tier, third tier towns in Thailand. It doesn't really compete in Bangkok. It's looking at a very specific market segment in specific size towns. If they moved to a broad overall low cost provider, that would be different.

BMW in focus differentiation — would anyone agree with focus? Why focused? Who is BMW sold to? Everyone? Rich people, but a lot of people buy BMWs. Sporty-ish. So it's not like someone who would buy a BMW — same market, very broad. It's families. I'm not saying Primark sells just to a particular socioeconomic class. It sells to a particular group of people in a certain segment of the market, not everyone. Whereas BMW — yes, you need to have money to buy it. But all that means is it's not a low cost provider. It doesn't mean it is a focus provider. You have to ask two different questions to decide whether it's on the left or right, or whether it's up or down.

[Student] The difference between AirAsia and VietJet — why is the low cost aware but on a different angle?

[Professor] Actually I might change AirAsia to broad, low cost, not at the bottom, because it sells to everybody. If we look at the pricing of VietJet versus AirAsia, VietJet is significantly cheaper. And it offers far less in terms of routes and so on. So I would say VietJet is definitely more of a low cost provider than AirAsia. Well, it might be, but the question is: people in that route — is it any specific group of people or is it everyone who wants to fly that route might take VietJet? So even if I can afford a better airline, I might take VietJet because it has the right schedule. I'm not taking another airline just because VietJet is much cheaper.

[Student] Sorry, Thai Union.

[Professor] Thai Union is an interesting one. What does Thai Union do? Tuna. Processed fish. So the reason I would say it's a best cost provider is: it doesn't sell — if you look at some of its brands, one of its brands is Chicken of the Sea in the U.S. It's not the cheapest tuna brand. It sells to a broad market. Its pricing — how it differentiates itself — is through sustainably sourced tuna or whatever. It's features of the product rather than the price. People are not buying Chicken of the Sea just because it's the cheapest tuna can on the market. So therefore it's a value provider.

So as you can see, this sometimes can be up for debate in terms of whether it's a focused or an overall, but generally you cannot argue about low cost versus differentiation. It's either something is focused on being one of the lowest cost providers — not the lowest cost, but one of the lowest cost providers — or they are charging more than what the cheapest people do for a certain type of other value that you get.

Let's look at this in a bit more detail. A company achieves low cost leadership when it becomes the industry's lowest cost provider, rather than just being — it means that your costs are lower than your rivals. It cannot be the lowest cost possible because then you're not making any margin. You have to be the lowest cost in the market, but you still need to have enough of a margin that you're not selling stuff at cost price.

When do people use this low cost strategy? When there's a lot of competition for a product that is so commoditized that people can't really tell the difference. Buyers use the product in the same way. Buyers incur low cost in switching from one producer to another.

[Professor shows examples of unknown garment manufacturers]

Does anyone recognize any of these brands or companies? No, right? Why? Because they're not well known for their brand. They sell to business. What can anyone guess what these companies produce? Garments. But what type of garments? Elephant pants. Thai elephant pants that you can buy for 150 baht in the market.

Now think about this. If I am a manufacturer or a textile producer of elephant pants that cost 150 baht at Chatuchak or somewhere on the street, am I going to be trying to convince my wholesale buyers to buy my brand? No, I'm convincing them to buy because I am the cheapest place to buy. One thousand sets of pants. So you have to compete on price because it's so easy for them to switch from one to another. The brand is irrelevant. Maybe they'll say, "Oh, we do a double hem." Does anyone care? How often are you going to wear those pants? Not very often. And if it tears after the fifth time, by that time the tourist has already gone home and can't complain. And at 150 baht, they're probably not going to complain. If it tears the first time, that's bad because then they can return it. So you have to have a certain minimum level of quality, of course. But what you're trying to do is create something at the lowest cost that you can while still making a margin.

So the way to get low costs is to try and create low cost in a way that other people cannot copy. Maybe you have a process or a technology for dyeing the garment that is much cheaper, uses cheaper materials, but still comes up with roughly the same product. And then you can sell it a little bit cheaper to your customers. But you have to avoid reducing the quality to unacceptable levels.

If you can do this right, you can take significant market share by underpricing your competitors and you can have larger profit margins when competing with rivals who are selling at a higher price — because your cost is lower, but you're not passing it on to the customer fully. You're still making your own margin. But the risk is that low pricing does not attract enough new buyers and you may end up in a price war, which is a problem for everybody in the market.

[Walmart video transcript]

Walmart isn't just the world's biggest retailer. It's the company that redefined retail supply chains forever. Long before Amazon, AI, or digital twins, Walmart built a logistics machine so powerful, so efficient and so optimized that it became the blueprint every retailer studied.

"Always low prices" — Walmart's entire supply chain started with one promise: everyday low prices. But to make prices low, Walmart needed one thing: a supply chain that costs less to run than anyone else's. In the 1970s and 80s, when most retailers ordered in batches and stored months of inventory, Walmart went the opposite direction: rapid replenishment, localized distribution, extreme efficiency, relentless cost discipline. Walmart wasn't trying to be a great store. It was a supply chain powerhouse that happened to sell retail goods.

Cross docking — the logistics revolution. Most retailers ship products from suppliers to warehouses to stores. Walmart built something better: cross docking. Here's how it works. A truck arrives from a supplier at a Walmart distribution center. Instead of storing the goods, they are immediately unloaded and reloaded onto outgoing trucks headed to stores. Goods spend less than 24 hours in the DC. Some never touch the floor at all. Why it matters: inventory stays low, products move faster, shrink and spoilage drop, transportation costs plummet. It was so effective that analysts called Walmart's DCs the beating heart of American retail efficiency.

To control speed and cost, Walmart made a bold move: build one of the largest private truck fleets in the world. Over 9,000 trucks, more than 12,000 drivers, and millions of miles driven every day. Why? Because control, efficiency. Walmart drivers operate with military-grade precision. Backhauling ensures trucks never return empty. Routes are optimized down to the minute. Strict maintenance schedules keep the fleet reliable. This meant Walmart didn't rely on external carriers. It controlled the entire middle mile.

Way before the word digital transformation existed, Walmart was already doing it. Walmart invested nearly one billion dollars in satellite and real-time data networks. That system connected every store, every truck, every supplier, every distribution center. When a customer bought toothpaste in a store in Arkansas, the supplier knew instantly. This real-time visibility allowed faster replenishment, accurate demand forecasting, vendor-managed inventory, lower stockouts, lower inventories. It was basically Amazon's data-driven retail decades before Amazon was even born.

Walmart doesn't tell suppliers what to do. It tells them how to plug into Walmart's system. They pioneered vendor-managed inventory (VMI). Suppliers like P&G and Nestlé monitor Walmart shelves and replenish automatically. Retail Link, an online portal giving suppliers real-time access to sales data — something unheard of at the time. Collaborative planning — Walmart worked with suppliers to remove waste from both sides of the chain. This level of integration created a seamless ecosystem where data replaced guesswork and efficiency replaced cost.

Walmart's supply chain teaches us one big lesson: efficiency is a strategy, not a cost cutting exercise. While others tried to save money, Walmart built systems to remove waste permanently. Today, Walmart continues to innovate: autonomous forklifts, AI-driven inventory systems, on-demand grocery delivery, robotics inside distribution centers, next-gen micro fulfillment for e-commerce. Walmart proved that in retail, the winners aren't the ones with the best stores. From small town Arkansas to the largest retailer on earth, Walmart's rise wasn't luck. It was logistics, discipline, and innovation. And in a world obsessed with speed, Walmart's supply chain still stands as one of the greatest engineering achievements in modern business.

[Professor resumes] So as you can see, Walmart built its low cost model by investing significant amounts in its supply chain — all from trucks to satellites to distribution centers. And while it owns much of the supply chain, it also outsourced a lot of the work. They don't have to hire people themselves to do vendor management. Unilever, Procter & Gamble will come in and check whether their stuff is in stock or not, and then restock and do that in the distribution centers. So actually, they have outsourced a lot of their labor costs as well. And the model of their business means that they have big warehouse type stores, so they don't spend a lot. And they're outside on the outskirts of a town or a city, which means they don't pay as much in rental or land costs.

Their volume buying allows them to provide some of the lowest costs for many things. And on top of that, they also have a lot of loss leaders, which they will charge less than cost for to bring people into the shop. Or they'll charge below cost for basic essentials like milk and eggs, knowing that when people come and buy the eggs and the milk because it's cheaper than elsewhere, they'll come and buy a bunch of other things where the margin is significantly better for them. So that's how you maintain cost advantage. Cumulative costs across the overall value chain must be lower than your competitors.

For example, Ryanair. Ryanair has considerable bargaining power over suppliers, even Boeing, because they only buy one type of aircraft, which means they only need one type of trained mechanic, one type of connection into the airport system. And they have a very standardized way of fitting out their planes. One type of plane — they don't go globally. They only have a certain number of routes. They can negotiate power with the airports. And they don't differentiate on loyalty schemes, on food, on entertainment — nothing. So they can manage to keep costs down. Did I ask you before how much it costs to go from Manchester to Ibiza? Ten pounds. They can do that because they keep their costs very low, which makes them very profitable.

There are many things that a company like Thai Airways, which is not a low cost provider but a broad differentiation provider, might be able to learn from them. They can't copy everything because then they would cut down on their differentiation. But there are definitely efficiencies that a broad differentiator could learn from.

So how do you manage your value chain? You can do economies of scale. You can build learning and experience. You can use your capacity — for example, in a factory, a lot of factories only work 12 or 18 hours a day. If you really want to utilize capacity, then you should have your factory running 24 hours. Supply chain efficiencies like Walmart. Input costs — how much do your materials cost? Can you source them cheaper? Production technology and design — can you build processes that work well? Can you reduce the cost of your underlying systems? How strong is your bargaining power? Are you a big buyer of these products? Can you reduce prices that way? Can you outsource or vertically integrate? Do you have incentive systems and a culture that allows you to drive efficiencies as hard as possible?

You don't need to remember all these things. What I want you to think about is: how can a company manage and reduce its costs? The biggest ones are economies of scale, bargaining power, supply chain, capacity utilization, input costs. Can you buy your materials for cheaper? Can you do what you're doing for cheaper? Can you reduce the cost of your processes? Can you outsource some stuff if you need to, or vertically integrate and therefore reduce your costs?

So to get a low cost edge, you either need to perform your value chain activities more cost-effectively or you need to revamp the whole value chain and bypass some products. For example, Thai AirAsia, just like Ryanair, they have a single type of aircraft, the A320. They have faster turnaround times. Does anyone know how long the average turnaround time is for a plane — the time between landing and docking and flying out again?

[Student] Forty-five minutes.

[Professor] A lot of airlines — forty-five minutes. I think these guys are at about 30 minutes or 20 minutes. Twenty minutes it takes them to turn around. Because if the plane is not in the air, they're losing money. So less time it spends on the ground, the more efficient their processes. So same core airline activities, but lower maintenance, training, and operational complexity costs.

To revamp the overall chain and eliminate or bypass things — if you think about IKEA, they don't have a lot of in-store assistance. And they have basically eliminated furniture assembly costs because they hand it over to the customer. Customers pick it up. Transport — you would have to pay more for delivery. So they have taken out whole chunks from their supply chain and their value chain. And they've redesigned the whole cost structure to make it much more efficient for them. That doesn't mean they are a low cost provider. What it means is that they've managed their costs well. So IKEA, as you saw, I wouldn't have put in the low cost category. It's a best cost provider, but it can be a best cost provider because it has managed to lower its costs.

You can sell direct to consumers, like Xiaomi — they became big because they started selling mobile phones online only, no distributors. You can streamline operations like Southwest, which has a single hub and flies faster to each destination. And you can reduce material handling by having suppliers do your distribution work for you, like Walmart.

The keys to a successful low cost strategy is spending aggressively on whatever it is that is required to drive costs out of the business. Walmart was not cheap when it was trying to build its supply chain. It invested over a billion dollars in satellites in the 80s because it knew it would help it in the long term to make things efficient, to identify where bottlenecks were. So you don't invest in new technologies until you know what the value is. These days, you see a lot of companies say, "Oh, AI, AI, AI." Walmart is not going to use AI until it can calculate exactly how much cost it'll save for the investment. And you have to constantly review it.

The problem is: overly aggressive price cutting will reduce your quality and cause problems. And if you follow an approach that can be easily copied, then you can't maintain your lowest cost status. And if you become too fixated on cost reduction, then you have problems — like GM just kept cutting prices without cutting their costs effectively, and they started having serious problems in the 90s and the early 2000s because they couldn't defend their brand well enough. They didn't have a cost advantage that could allow them to lower their costs.

And sometimes what happens is you end up with Deepwater Horizon. BP ignored safety warnings on the plug that was underwater — all these things — they were focusing on cutting costs in their extraction of oil. But they focused so much on the cost cutting that they did not manage safety. And you know, I've heard from most oil companies that they will say safety is number one. They didn't do that here. They cut costs, which meant that their risk management was poor, which ended up costing them billions and destroying the environment for many, many years.

[Video transcript: The Boeing 737 MAX story]

In 2018, one of the world's most trusted aircraft manufacturers made a decision. This is the story of Boeing. 346 lives destroyed, billions in market value, and an entire aviation industry shaken. This is the story of how Boeing's obsession with cost cutting turned the 737 MAX into a death trap.

Imagine you're a passenger boarding a Boeing 737 MAX. You have no idea that the plane you're about to fly in was designed with a fatal flaw — not because the engineers didn't know better, but because the executives decided that saving money was more important than saving lives. This is what happens when profit becomes the only metric that matters.

Boeing wasn't always like this. For decades, they were the gold standard of aviation. They built planes that people trusted with their lives. But in the early 2000s, something changed. Airbus launched the A320 NEO, a fuel-efficient aircraft that was stealing Boeing's market share. Airlines loved it because it saved money on fuel. Boeing needed to respond fast and they needed to respond cheap.

Instead of designing a completely new aircraft, which would take years and billions of dollars, Boeing decided to modify their existing 737. The 737 had been flying since 1967. It was old, it was proven, and most importantly, it was already certified by regulators. This meant they could get the new plane to market faster and cheaper. They called it the 737 MAX.

But there was a problem. The new engines were bigger and heavier. They had to be mounted higher on the wing to avoid scraping the ground. This changed the plane's aerodynamics in a dangerous way. The nose of the plane would naturally tilt upward during certain flight conditions. Boeing's engineers knew this. They knew it could cause the plane to stall, and they knew exactly how to fix it. They created a system called MCAS — the Maneuvering Characteristics Augmentation System. It was supposed to automatically push the nose down if the plane started tilting up too much. Sounds good, right?

But here's where the cost cutting begins. Boeing decided to use only one sensor to detect if the plane was tilting up. One sensor. If that sensor failed or gave wrong information, the system would still activate, pushing the nose down with no way for the pilots to stop it. Why only one sensor? Because adding a second sensor would cost extra money and require more pilot training. And more pilot training means more expenses for airlines. Boeing knew that airlines were price-sensitive. They knew that if the 737 MAX required more expensive training than the old 737, airlines might choose Airbus instead. So they made a choice. They chose the cheaper option.

Boeing also hid the existence of MCAS from pilots. They didn't tell them about this critical safety system. They didn't tell them how it worked. They didn't tell them how to disable it if something went wrong. Why? Because if they did, they would have to provide additional training and that would cost money. Instead, they told airlines and pilots that the 737 MAX was essentially the same as the old 737. No new training needed. Just plug and play.

In October 2018, Lion Air Flight 610 took off from Jakarta with 189 people on board. The plane's sensor was faulty. It was telling the MCAS system that the plane was tilting up when it actually wasn't. MCAS activated. The nose pushed down. The pilots didn't know what was happening. They didn't know about MCAS. They didn't know how to stop it. The plane crashed into the Java Sea. Everyone died.

Boeing's response was shocking. They blamed the pilots. They said the pilots should have known how to handle this situation. They said the pilots should have been better trained. They said nothing was wrong with the plane. They didn't ground the fleet. They didn't issue a warning. They did nothing.

Five months later, in March 2019, Ethiopian Airlines Flight 302 crashed near Addis Ababa. 157 people died. Same problem. Same sensor failure. Same MCAS activation. Same outcome. This time, the world was watching. This time, countries started grounding the 737 MAX. This time, Boeing couldn't hide anymore.

The investigation revealed everything. The pilot training, the single sensor, the lies. Boeing had prioritized profit over safety. They had gambled with people's lives and they had lost. The 737 MAX was grounded for 20 months. Boeing lost 100 billion dollars in market value. They paid billions in fines and settlements. They paid billions to fix the plane. They lost the trust of the entire world.

But most importantly, 346 people died because executives decided saving a few million dollars on safety was worth the risk. This is the ultimate lesson of the Boeing 737 MAX. When you cut corners on safety to save money, you don't just lose money. You lose everything. You lose lives. You lose trust. You lose your reputation. You lose your future. Boeing learned this lesson the hard way and the world will never forget.

[Professor resumes] I don't know if you know the history of Boeing, but it was known as one of the best engineering companies in the world. What happened was in the 90s, they merged — in fact, they acquired McDonnell Douglas, which was a military aircraft manufacturer. That management that eventually took over Boeing was far more focused on financials than on engineering. They're selling military aircraft — you don't need to negotiate. You just tell the government this is how much it is. They'll pay you. Whereas customers like American Airlines want to know how much cheaper it's going to be. They started pushing down costs and they started pushing back against engineers who were trying to build safe aircraft. This is what ended up happening. The easiest thing is to say human error. I think one of the reasons it became such a big issue after Ethiopian Airlines was because there were so many UN people on that flight. Suddenly, many countries are now asking this question. That's the danger of low cost strategies and focusing too much on cost.

How do you differentiate apart from cost? None of you said you are low cost providers. All of you are differentiating in some way. Do you know how you are differentiating? That becomes the question.

If you can differentiate well, you can command a premium price, you can increase sales, and you can gain buyer loyalty. Apple can command a premium price for its product. Even if most of us will never use the full capability of a MacBook, we buy the MacBook because it's got the brand. It promises that we can do that if we want to. If you think about Nike, their distinctive features and strong brand positioning goes beyond just selling to athletes and sports people. They're selling to the general public. Do you know what the market for non-athletic wear to non-athletes is called? Athleisure. It's a combination of the two.

You can gain buyer loyalty by creating an emotional attachment and switching resistance. Starbucks — compare the cost of a Starbucks cappuccino with the cost of an Amazon cappuccino. It's quite different — 100 baht versus 160 baht. Big difference. What are you paying for at Starbucks? You're paying for the brand. When it started its coffee shops, it had a very clear differentiation because at that time you would go and get coffee at Dunkin' Donuts or a coffee shop and you would take it and go away. It was mostly walk in, walk out. What they created was what they called the third place — because usually you spend your time at home or at work, but sometimes you need a third place to go to. And that's what they created. Which is why when you went to a Starbucks — and these days it's changed quite a bit — there were sofas and you could sit there for hours with one coffee because they wanted you to enjoy that space. And that's what they were selling. I think the business model has changed quite a bit now, but that's how they originally differentiated themselves.

To be a good differentiator, you need to study what your customers are looking for and you need to incorporate features that appeal to your buyers but are also sustainably distinctive. You can't add a feature that other people can copy because it won't be distinctive for very long. You need to use higher prices to recoup your differentiation costs because it costs you more to produce that differentiation.

When we create differentiating attributes, we look at these four: product features, customer service, and so on. Product features — think about something like GoPro. GoPro is not just a camera. It's a camera that differentiates itself by being able to be used for extreme sports or for sporting events. You can attach it to your helmet, to your bicycle. You can't do that with a Nikon or a Canon.

Customer service — Ritz Carlton, or the Langham, or wherever. Product R&D — most pharmaceutical companies will focus on differentiating by new products. Technology and innovation — these two are pretty similar, but technology and innovation is seen as a different area. Nvidia focuses on innovation within the technology frame. And I think the big difference is: product R&D is about trying to produce new and innovative products, whereas technology and innovation is about innovating in your business model and in how you do business or how you implement your technology.

Input quality — think about Rolex and the type of materials they use is not the same as Casio. Employee skill and training — that's a key differentiator, especially for service companies like consulting firms.

Sales and marketing — Red Bull. I mean, what is Red Bull but caffeine and sugar? And guarana or something like that. Apart from the carbonation, is Red Bull any different as a product from its origin product, Krating Daeng? It's not really. It's almost exactly the same product with a little bit of carbonation. What differentiated it is the marketing and the positioning. It has become the go-to drink in certain types of environments. Extreme sports — connected with GoPro. But also clubbing and nightlife. Nobody goes to Sing Sing or whatever nightclubs and asks for Krating Daeng and vodka. You ask for Red Bull and vodka. In fact, you probably ask for Red Bull and Grey Goose because those things are starting to be attached to each other. So it has built up brand awareness.

Quality control and processes — Toyota. That's the easiest example to get. There are many companies that do really well on process management, but Toyota is well known for it.

So what are your drivers for differentiating yourself? Differentiation works well when different buyers need the product for different things. For example, if I am in the market for a camera, I need to think: do I need a camera to go on safari? Then I need a camera that can get a zoom lens. Do I need it for my cycling? Then I need a GoPro. Do I need it for a marine park? Then I need a waterproof camera. So there are different uses for the product and you can differentiate yourself for that segment of the market.

There are many ways to differentiate the product or service that have value to buyers. Think about sneakers — people use them for running, for walking, for jogging, for leisure. So you can sell to any of these different markets in multiple different ways. Think about how many different smartphone types there are. Some people want a good camera — then would you buy a Vivo or an Oppo? Vivo is now partnering with Leica for their camera lenses. So that's something that would be useful for certain types of people. Or you want something that's small, or you want something with a long battery life. And there are few rival firms following a similar differentiation.

Technological change is fast-paced. ASML is the only company that makes photolithography machines that can produce chips. Technology changes fast-paced — think about how quickly iterations of AI and LLMs are happening. Every few months, there's a new model and a new version and something else is offered. When it started, it could talk to you and you could have a chat with it, and then you could create pictures. Now you can create video. Eventually you'll probably be able to create full movies with AI without any input from actors or anything like that.

When buyers value quality, brand, or status more than price, then you can build a brand that people like for what it says about your status. You're signaling value. You are not selling a tangible feature — you are selling something intangible. Something that is subjective and hard to quantify. Can I tell you whether a Porsche is more luxury than a Louis Vuitton bag? Can I tell you whether a Ferrari has more status than a Maserati? You could argue both ways. And often when buyers are unsure what their experience with the product will be, a brand is useful because then they can say, "Okay, well, I know it's a Porsche, so I know it's a good sports car. I'll buy that because I don't know much about sports cars."

When repurchase of the product or service by buyers is infrequent — you're not going to buy a new Ferrari every year. Some people might, but most of us don't. And buyers are unsophisticated — so they need something to signal the value of the product. And that comes from the brand.

In order to have a sustainable differentiation, you need something that other people can't copy. Company reputation, a unique service image, a longstanding relationship with buyers. And you could also try and lock them in by patent protection or high switching costs. Like Microsoft — once you've got Microsoft in your system, it's very expensive to try and change. And who do you change to? OpenOffice? There are no real competitors. So they're locked in. If you're using Microsoft for your underlying system, then you might as well buy Microsoft Office for everything, because it's much harder to use other products on top of Microsoft.

The problem with pursuing a differentiation strategy is when you produce something that other people can easily copy. If you try and move into a touchscreen and everybody can copy it, or if you have a keypad that everyone can copy, then you're not going to succeed for very long. Or you try and create a differentiation that people are not really interested in. When Google Glass came out, they didn't sell very much — people weren't that interested. Now, there are bigger problems. In fact, I think Meta is dropping the Ray-Ban partnership. You know who they're partnering with now? Kylie Jenner. One of the Kardashians. But the problem there is that not only is the buyer response unenthusiastic — there are problems with it. A lot of people feel: I don't want — if I were to ask you, how would you feel if someone in this class was using Meta glasses, which could record everything that was said? Now the class is being recorded. But on top of that, every private conversation you're having with them is being recorded. And you don't really know, even though there's a little red dot — people hide that. What would you feel about that? Would you be comfortable with that? So there's big pushback happening with the Ray-Ban.

Other problems: overspending to differentiate your product, eroding profitability — like WeWork. WeWork was just a co-working space. But they said, "Oh, we're this high tech collaborative working space" and so on. They spent huge amounts of money getting into the best buildings and making their place look amazing. But they overspent. And eventually people realized it's just a real estate rental company. And it collapsed.

Trivial improvements — think about Windows Vista. Windows Vista came out and people hated it. Because not only was it a trivial improvement, since it was worse than Windows 95. And that bit Microsoft quite badly.

Or you have so many features that people don't need. How many of you even know all the features in your mobile phone? Probably not many of us. So why do that? Why cost money?

Or charging too high a price — there was a juicer. All it did was juice fruit and vegetables. $400. It didn't succeed as a company. So when you're differentiating, you have to watch out for these problems.

Let's go back to focused low cost. The example that's in the book: Clínicas del Azúcar. I think it's in Peru or Colombia. Basically it's a clinic which focuses specifically on diabetes, which allows it to save costs in multiple ways. First of all, they can buy their insulin and any other medication involved because that's all they need to buy. Secondly, they can train up their nurses to be specialists in diabetes, which means they don't need as many doctors. And thirdly, they become known as a specialist in that, so many more people will come to them rather than go to a general clinic if they have diabetes.

Focused on — when was the last time anyone shopped at Daiso?

[Student] Last week.

[Professor] What do you buy at Daiso?

[Student] Stuff you don't really need.

[Professor] Because it's clever. Yes, you can buy ice cream at the counter. But if you go in there, you're usually looking for cleaning products, like a mop or something for your kitchen. But actually what they sell — and that stuff they sell at a very good price, probably as a loss leader — but what you end up doing is walking away with a fake Labubu and something else for your shoes that you think you will use but you'll never use. So it's very focused — they focus on the cheapest stuff. 60 baht. Very focused.

Aldi — budget conscious grocery shoppers. Yes, a lot of different people shop at Aldi. But Aldi's market is quite different from, in the UK at least, from people like Sainsbury's or Tesco. Tesco is probably close to Aldi's. But Aldi is significantly cheaper because it has its own private label brands — it can sell the same products at the same quality for less than you would get from Tesco's. Definitely less than Sainsbury's or Waitrose.

For me, I think Muji is for people who love storage. I love storage. I love boxes. I have boxes that I don't know what to put in, but I like the box. So I'll keep the box. Anyone else like that here? A few of us. So yeah, those are the people that Muji sells to. A special type of box to put your shoes in.

Fox News — focus differentiation. Who does it focus on? Conservative, lower middle class viewers. That's it. And it owns that market. Owns it. OAN has tried, but hasn't really made a lot of headway. And it's much, much smaller.

Greyhound in Thailand — fashion conscious consumers that are looking for Thai-inspired design. That's how it differentiates.

So you can see that you can have a focused market either as low cost provider or as a differentiator. When is focused low cost or differentiation attractive? When the target market niche is big enough to be profitable.

Glossier — has anyone heard of Glossier? It's minimalist, skin-first beauty for millennial and Gen Z women. It's about health first — making your skin more healthy rather than making it whiter or more beautiful first. Yes, it's supposed to make you look good, but it focuses on the health aspect first.

Industry leaders choose not to compete in the focuser's niche because the focused provider doesn't want to compete against people who sell broadly. Bose — does anyone know where Bose comes from? Does anyone have Bose headphones? They're from the US. They're named after the founder who founded them while he was at MIT. Vikram Bose. Bose is quite a common Indian name in some parts of the world. A lot of people I talk to think it's a German name. It's an Indian name, which is quite weird for a lot of people. But his focus was on audiophiles — people who want to hear every little scratch of a record. For me, I would never buy Bose because I don't need that level of quality. For me, AirPods are fine. But people who buy Bose will laugh at AirPods. "What rubbish is this? Can't hear every single frequency." And most headphone manufacturers are not going to compete.

It's costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers. If you think of the ryokan style hotels, Marriott and Intercontinental are not going to try and compete with these guys because they don't have the capabilities required for these small guest house type inns.

Individual players can differentiate really well. The industry has many different niches and segments — like Etsy. Handmade and vintage. Everybody can sell their stuff. Handmade, whatever — all sorts of products. Many, many different niches.

Rivals have little or no interest in the target segment — like Harley-Davidson. Nobody's really competing with them for their customers. There's a certain type of person that will buy a Harley-Davidson. Anyone into Harley-Davidson here? How would you describe the market for Harley-Davidson?

[Student] Niche. Middle aged men. Middle aged accountants.

[Professor] Right. Not biker gangs. It's the tattoo and the beard and the gangsters — and yes, they still buy. But actually most of the people that buy are middle aged, middle class, well-off people.

I used to share a really interesting story about how Honda entered the U.S. market. It didn't try to compete with Harley-Davidson and the big bikes like Triumph and so on. And it couldn't, because it didn't have the capability at that time. So it shifted and started focusing on scooters, which it wasn't originally producing. The scooters were originally made just for their staff to drive around L.A. They were used for delivery of letters and messages in Tokyo. They weren't a major product. But they managed to shift and sell that.

So how do you differentiate yourself? You can differentiate yourself operationally, like Toyota does with total quality management. Or Amazon does with one-click. One-click is an amazing tool to get impulse buyers. Because if you press one click, it doesn't go into your cart. It gets sent out immediately. It's for people who buy on impulse. Most people would say click into cart. But some people — "Oh, I feel like this" — one click. They have made so much money from this one click.

Or you can differentiate by product. Dyson has lots of different innovations. Different car manufacturers differentiate in multiple different ways, but they differentiate their product in terms of features and quality and so on.

You can differentiate by your business model. Low-cost airlines versus the traditional big airlines. You can create a whole new industry — and we'll talk a little bit about that when we talk about Blue Ocean.

Apple iTunes — when the iTunes store came along, before iTunes, there was no way to legally download music. You had to download it from Napster or LimeWire or somewhere because there was nowhere to buy it if you wanted to buy digital music. Steve Jobs had to argue with record company executives for a long time to sell this stuff online because they thought, "Oh, rights management. We'd be selling single songs because we make our money by selling albums where one or two songs are really popular and then people won't buy the other songs." All sorts of stuff. But eventually he convinced them. His argument was that people don't want to steal songs that they like. They want to pay for them. If you give them the opportunity, they will pay for them. And yes, people will still download illegally, but the majority of people — if you make it easy for them to buy it, they'll buy it. And that's what happened.

And management — if you think about WL Gore or Semco. I'll talk about Semco when we talk about implementation and culture in organizations. But does anyone know what WL Gore does? They make materials — manufacturing materials design and innovator. They produce Gore-Tex, that waterproof but breathable material that many different brands use. But their biggest innovation is their organizational culture. Very flat, very non-hierarchical, and skills-based.

You could see that in 2005, when they had to hire a new CEO from outside, the board didn't decide. They asked everybody in the company: who do you think should be CEO? And their premise is: if you call a meeting and nobody comes, you are not a leader. If people want to follow you, that's what makes you a leader. And so they chose someone who had been an engineer in the company for 30 years. Her name was Terry Kelly. And she became CEO because people trusted her and believed in her. And she grew the company amazingly. She was CEO from 2005 to about 2014 when she retired and moved into other board positions. But the structure of the company was such that it really was about: how do people feel about leadership? They get to choose their leaders. Semco is very similar in a very different environment and in a different country — Brazil.

So: how do you differentiate your product? Is it a sustainable differentiation? That's the question for you.

There's a clip from a World Economic Forum talk by a management guru called Sumantra Ghoshal, who is very well-known globally. He worked in India and at London Business School, but before that at INSEAD in Fontainebleau in France. And he talks about the culture of a company as the smell of the place.

He says: when in summer I have time to go home and my kids have holidays, I go to my hometown Calcutta. And Calcutta in summer is heavy. It's tiring. It's hot. It's humid. You don't want to go out. You just don't want to work. You just want to relax and chill. Whereas if you go to the forest in Fontainebleau in spring — he says, I dare you to try and go there and take a leisurely walk. You can't. Because something about the crispness of the air, something about the smell of the place makes you want to jump and run and jog because it gives you energy. The place gives you energy.

And the question he asks is: what is the smell of the place of your company? Because people are the same wherever they go. And the environment makes them want to work better or worse. Can you create the forest of Fontainebleau in spring? Or is your company Calcutta in summer and nobody does any work because you haven't created the atmosphere?

So how does Apple differentiate itself? Design, sure. Operating system, sure. And pricing strategy — premium end of the segment. Whether it's the low segment, the middle segment, or the top segment, they always price at the top end of whichever segment they're selling to.

Tiffany — what are Tiffany's differentiators? Premium jewelry. But how do they make it premium? They have different products. They sell on their brand and they sell on price. Because of their brand, they can sell very similar jewelry for a much higher price if it's branded Tiffany. And Tiffany Blue — it's called Tiffany Blue, but it looks green to me — it's a copyrighted color that nobody else is allowed to use. And that represents them wherever they go.

You know that Coca-Cola red is also copyrighted. And you know why that might be a problem for many of us? Because that is the color of Santa Claus's suit. The first appearance of Santa Claus dressed like that is from a Coca-Cola commercial. In fact, there's a mobile phone company in South Africa called MTN, and their centers are not red. They're yellow, because their brand is yellow. But you could get sued for using Coca-Cola red.

Emirates — customer service, latest technology. Lush — handmade products, ethics, ethical sourcing, and so on.

Hermès — how does Hermès differentiate itself? Craftsmanship is what they'll say — because we have these 27 ateliers. And exclusivity. And price. Louis Vuitton may cost the same, so they're not differentiating themselves just on price. What they're differentiating themselves on is exclusivity. You cannot just go and buy a Birkin bag. Or a Kelly bag. You have to build up to it. You have to spend about a hundred thousand dollars on stuff that you don't even want or need before you get invited to buy that bag. And they'll say, "Oh, it's only because we are handcrafted and we don't make many. So we're out of stock." You see it in the window and you say, "Okay, that's sixteen thousand dollars. Here's sixteen thousand dollars. I'll take it right now." "Sorry, that's not for sale." "But it's right here." "Oh, sorry. But that's not a sale item." And someone else will come in and they'll sell that item to them because that person has bought so many other things from them.

I know people travel the world looking for places where it's easier to buy Hermès products. I know people that say, "Oh, actually, it's easier to buy Hermès in Switzerland or in Germany rather than Thailand because the waiting list in Thailand is so long." So people will travel the world just to get it. Any of you own Hermès bags? Or too embarrassed to say?

[Student] Actually, if I studied in France, my mom bought the bag in Japan. Because in France, the shop in Paris never sold the bag to my mom. So she took to Japan and they kind of presented this bag as "we have only one bag in the whole Osaka region" or something like that. And I always remind my mom that this is bullshit. So do not follow them. But she bought it in Japan. And yes, so she couldn't buy it in Paris. She had to go to Japan to get it. And also when my mom saw her bag — looking for two Kelly bags — like, this cost half of my provisions. So I don't know what she wants.

[Professor] Because of the status. And the exclusivity. And it's really interesting because you can go to Shanghai and go to the fake market in the underground and you can get an identical-looking Kelly bag for three hundred dollars. But most people — the people that can afford the Kelly bag don't want the fake. They want the real thing. Even if people cannot tell the difference, they can tell the difference. So they're buying it for something else than what it looks like. They're buying it for an experience and a feeling.

So before we close off, we'll look at best cost providers. In the middle, you're producing something that's of good quality, that is comparable to the premium end of the market, but you're selling it at a slightly lower price. People like IKEA, Uniqlo, New Balance. What you're aiming for is not the people looking for exclusivity and luxury, and not the people looking for the lowest cost. You're aiming for the people that are looking for value. They're willing to pay money, but they need to feel that they're getting value.

There's something to think about here. If you're focusing on a best cost strategy, there's a danger. Because if you're in the middle, you can get squeezed by the high end people lowering their prices a little bit, or the low cost producers adding more quality. And then you're stuck. Sony Vaio eventually didn't succeed because it couldn't offer as much value for the price that it was charging — as Lenovo started producing pretty good quality. And on the other end are the high end differentiators like Apple, who started selling MacBook Airs for about a quarter of the price of MacBooks. So Sony Vaio got squeezed out.

This is a summary of the value stick in the book, which looks at only the middle piece — your cost, your price, and the value. It misses out the supplier value. So the average competitor: there's a cost, there's a price, and there's a value.

A low cost provider will charge less in its price, offering similar value, because it can lower its costs dramatically through efficiency or scale or whatever.

Differentiation means that your cost may be a little higher, but it also means you can charge a little bit higher because people see more value from your product.

The best cost strategy: your price is roughly average, but people think they're getting more value for that price, and/or you're managing your costs so you're making more margin.

So this is a summary of the five strategies in terms of economic value.

That's it. So what I'd like you to do — you don't need to do this in groups. When you go away tonight, as you're doing your Google Doc reflections — you're remembering to do that, right? — as you do your Google Doc reflections, think about: what are my value drivers for my company? What really differentiates me from my direct competitors? And if I find that, is it sustainable? Is it something that is so internal and built in that people can't copy it easily? If someone builds a restaurant just like mine selling the same cuisine next door to my shop, will people move over the long term or will they come back to me because I offer something different than just Thai food? Maybe it's the quality and maybe it's the chef that I have — whatever it is.

Okay, so we'll end there. I think we've covered most of what I wanted to do today. So thank you all very much. Any questions before we close?

Oh, I've told you about the quiz tomorrow, right? So no devices. Please bring a pen with you. We'll try and have some spare pens — pen or pencil. It'll be on paper and it'll be multiple choice. There'll be one sheet where you put your name and you answer the questions, and then you can tear that off. But we'll want the questions back as well, because we reuse the questions sometimes. You will get your answers by the next lecture.

I can't believe that we're coming — like, more than halfway through. I feel like there is still so much to do. So I'll try — and I know I'm going quite fast. Are you okay with the speed? I mean, the reason I feel comfortable going with the speed is because you guys have a lot more experience than the MBAs. The MBAs get about 40 percent more time than you to do the same similar content. So I create different activities and exercises and I focus on different things. Okay, thank you, guys. Have a good evening. I will see you tomorrow afternoon. Thank you very much.

[Student] The test is at the beginning or at the end of class?

[Professor] At the beginning.

[Student] I think this one you have to put in the reflection.

[End of lecture]