Once you've mastered sustaining your competitive advantage, it's time to kick back and enjoy the good life, right? 

Or should you worry (next) about "protecting" the things that went into building your competitive advantage? 

First, this is a "good worry."  A lot of businesses never become successful enough to be concerned about this problem.  But because you excelled in BA-101, you've been successful beyond all expectations. 

So, just when you think there's nothing more to worry about, someone asks whether your competitive advantage is adequately protected. 

Before you answer, they ask another question, "What is it that makes up your competitive advantage?  How could you protect it if you wanted to?"

Thanks again to your outstanding performance in BA-101, you're not only prepared to answer these questions, but you've also got lecture notes and some PowerPoint slides to help:

• Download intellectual_property_week_3.ppt

Throw another log on the fire, open up the PPT slides and enjoy...

If your competitive advantage comes from an efficient manufacturing and production process, protecting your competitive advantage may be a little easier:  make sure your equipment is securely bolted to the warehouse floor. 

Add some insurance to protect against fire, flood and theft and you've done a good job keeping your competitors at bay.

But what if your firm's competitive advantage comes from ideas or ways of doing things that can't be bolted down or locked up at night?  Certainly, they're valuable, but how do you define or describe them so they can be protected.

Maybe you've designed something or have a "special way" of doing things that your customers want and like.  Because you've been successful, you worry about imitators.  You've spent years perfecting how to do things but could someone steal your "style" and get rich off all your hard work? 

You remember from the "salad days" of BA-101 that filing a patent or copyright gets some protections, but how much and for how long?  And how would you "use" these protections?  What are they really worth?

And isn't there another big problem with patents, marks and copyrights?  Don't you have to publicly disclose what's being protected?  What's that cost/benefit tradeoff look like?  Is there some other way to protect my "trade secrets?"

This post deals with the Third Week's material.  It's full of ideas and terms to take away from your Textbook reading (Chapters 12 and 13). 

Here also are my Lecture Notes and PowerPoint slides for the Third Week: 

• Download Week 3 - Competitive Advantage

Look closely at the elements of Product Differentiation; they'll need to be part of your Business Plan's Strategic Concept submission.  Also think about using the Perceptual Mapping "tool" for your market segmentation analysis.  Finally, don't overlook your "Distribution Channel" as how you'll obtain and sustain your Competitive Advantage.

Here are some helpful hints for figuring this out...

Chapter Twelve (12)

You'll get your money's worth from this chapter.  It introduces you to two of the biggest questions you'll face:  "What's our Product?" and "Who's our customer?"

Note:  When we refer to "product," we'll be including "service."  It's simpler to use one word (product) than three (product and service).

 

Before we get too far, you're probably wondering which is the chicken and which is the egg?  Does the product (chicken) come before the market (egg) or is it the other way round?  Or do both happen at the same time and bounce back and forth? 

Let's see if an answer appears as we plow through this week's material.

Product Line and Mix.  Understand the difference between them.  One is a tactical action that extends the use and economic "life" of a firm's core product (Line).  The other is a strategic action intended to address a deficiency in the firm's core product or products (Mix). 

Another way to keep them straight is to think about the resources necessary for each.  Does a "Product Line Extension" require substantial amounts of new resources or is it a refinement of an existing competitive advantage?  What about a "Product Mix Strategy?"  Doesn't it require a set of financial and human resources that the firm might not have?  How will those new resources "fit" with the firm's current (and presumably efficient) organization?

Product Life Cycle.  This is a great strategic planning tool.  We'll expand its application to a product's pre-development stage and use it to illustrate the differences between Product Line and Product Mix.  What's the Life Cycle of your Product look like?  What stage are you in?  How accurate is your prediction of the Cycle's future direction and slope?

Product Differentiation.  Think about all the differences between competing products.   Sure, there's price, packaging and physical features, but what about "intangible attributes?"  What about a product's warranty?  What about "image" and "style?"  And do the differences make a difference?   Are the differences important to the only people whose opinions matter:  your customers?

Brands and Branding.  These terms introduce the idea that something can be valuable without having a physical presence.  Can ideas or ways of doing things create value?  If they do, won't you want to protect them from your competitors?  How do you do that?  Could you have it patented or trademarked?  What does that get you?  Why not have all your employees swear never to disclose any of your firm's trade secrets?  Is that a better approach?

Market Segmentation.  Who's your customer?  Where are they at?  Why will they like (or not like) your product?  What do your customers look like and how do they act?  Are they young or old, rich or poor, want prestige or not?  What's happening to the scale of your market segment?  Is it increasing or decreasing?  Is your market share likely to be a small niche that might not be profitable?  Or will your market share increase exponentially because your product transcends many market segments?   

Pricing.  You'll find plenty to chew on here.  Don't worry about penetration, predatory or prestige pricing.  But do think about the two ways in which you must price your product. 

The first approach is external.  What's the price being charged by your competitors?  What's being sold for that price?  How do you stack up against them?  Is your price competitive?  What's that mean?  Are you delivering more "bang-for-the-customer's-buck?"  Are your customers "price-sensitive" or "value conscious?" 

The second approach to the pricing question is internal.  Simply put, you've got to be able to produce and sell your product profitably.  What are all your costs?  Will your customers pay enough for your product that you can cover your costs and earn a satisfactory return on the time and money that's been invested. 

Costs are usually fixed (don't vary with the volume of production) or variable (vary with the volume of production).  Understanding the "mix" of fixed and variable costs is essential. 

And, to make things even more interesting is understanding that the "amounts" and "mix" of your costs will change during stages of the Product Life Cycle.  If there's one thing that's constant in business, it's that everything is always changing.  Chances are you'll never have just one break-even point; it's a moving target determined by production volume, inventory costs and competitive pressures.

Chapter Thirteen (13)

After all the excitement in Chapter 12, I'll bet you can hardly wait for Lucky Number 13.  Our focus here will be on Distribution Channels.

That means you can glide over Transportation (Section 3), Retailers (Section 5) and Wholesalers (Section 6).  But dig into (1) what should be in your distribution channel? and (2) how are distribution channels organized?

Look at the levels of distribution channels.  Why would you want to use a multi-level distribution channel?  How could a new business benefit from a multi-level strategy?  Will your innovation (and your competitive advantage) be adding more services to your distribution channel (UPS) or changing its arrangement (How does Costco do what it does?  Do their customers find that valuable?)? 

Here we are in the course's third week and here's the study guide for this week: Download Third Week Study Guide

Pay particular attention to the three elements of marketing strategy: differentiation, segmentation and distribution.

How can you obtain a sustainable competitive advantage with one of those? Don't try for all three. You can't be all things to every customer in the solar system.

Your goal is to obtain a sufficient market share that allows you to earn a reasonable return for your investment and the investments of your partners or shareholders.

Don't forget those investments aren't always the financial kind. People want and should be compensated for the time and effort they put into the enterprise.

The federal government is using both fiscal policy and monetary policy to stimulate consumer and business demand and end the current recession. If things work as planned, positive economic growth will be restored (how long this will take is another problem for another day).

Fiscal policy, as we've discussed, can have two approaches. The one getting most of our recent attention is "stimulus spending." It is based on a theory that properly-directed government expenditures will have a "multiplier" of greater than one. In other words, one dollar of government spending will produce more than one dollar of gross domestic product.

The other "flavor" of fiscal policy is tax reductions. The idea here is lower taxes mean more disposable income for consumers who will spend and invest more thereby boosting economic growth and helping end the recession.

Surprisingly, there isn't much empirical evidence to support using one or both of these tools. The ideas have been around for a long time as theories but there aren't many studies that tell us which works best.

Here's a recent article from the Wall Street Journal reporting some research done on this question by a Harvard Economics Professor: Download Stimulus Spending Doesn't Work.

I won't spoil the story other than to point out that (1) the unemployment rate during the Great Depression was consistently around 25% and (2) lowering income taxes when personal and corporate incomes are falling is a double-whammy for local, state and federal governments.

Understanding Monetary Policy and Interest Rates becomes easier when the ideas are illustrated.   A great way to do that is by looking at some Yield Curves.

Yield curves are nothing more than plots of interest rates as of a specified time based on maturities. 

The "based on maturities" part of that definition gets clearer if you think about "money markets" being where different financial products are bought and sold.

Helpful Note:  Financial markets deal in dozens of different bonds, paper, bills, instruments and notes.  It can get overwhelming.  Keep it simple by remembering they're all just products.  How they differ from one another isn't important.  Every market, including money markets, has buyers (someone wanting a financial product that pays a specified amount on a certain future date) and sellers (someone providing the financial product that will do that).

One of the ways financial products differ from one another is by their term.  One product you buy today might not pay-off for one year while another might not pay-off for 20 years (these time periods are called the product's "term").

Obviously the "price" you pay for a product with a one-year term will not be the same as what you pay for a product with a 20-year term.  And what makes them different is the interest rate for one won't be the same as the interest rate for the other. 

Things get very interesting (and even exciting) when you think about the relationships between these differences and how they change over time.  That's when Yield Curves become your new "best friend!"

A picture of the financial markets in January 2004 looked like this.  It's how the "Yield Curve" looked after the financial markets closed on January 6, 2004.

See how Interest Rates for Long-term products are higher than Rates for Short-term products.  Is this how Economists predicted the picture should look?  Why is that?

Part of your answer probably considered whether risk increases over time.  In other words, don't the chances of something bad happening increase as you wait longer for something to happen? 

And aren't there two perspectives on this problem?  One might be things outside your control such as inflation or the price of oil.  And the other might be things you can control (or at least do something about) such as whether the seller of the financial product you bought will pay what's owed when it's owed. 

It also helps to remember that (1) 2004 was an election year and a robust economy usually helps incumbents get re-elected and (2) job growth and the stock market both weren't healthy back then.

With that in mind, it makes sense that the Yield Curve was up-sloping when 2004 began.  Monetary Policy-makers at the Federal Reserve were trying to stimulate the economy by keeping short-term interest rates low while long-term financial products' buyers wanted to be compensated with higher rates for their added risks.

The history books report the economy boomed during 2004, 2005 and 2006.  As you remember, the Federal Reserve System's Federal Open Market Committee was raising short-term interest rates during this time to keep things from over-heating, that is, check inflation before it got out of hand.

So, what did the Yield Curve look like in January 2007 after the economy sizzled for three years and the Fed was raising interest rates?  Would you expect short-term rates to be higher and long-term rates be even higher?  Isn't that what our theories and history tell us it should look like?  Well, here is the January 2007 yield curve...

Surprise!  Not what you were expecting, right?  Looks backwards, doesn't it?

Short-term rates, as expected, went up a lot (from about 1% to about 5%), but long-term rates went down a little bit.  What we see is a Yield Curve that is "inverted" from its customary form.

If the housing industry thrives on cheap long-term credit, do you see why it over-heated?

But what explains this?  Have our economic theories stopped working?  The answer is no, but what went wrong was we didn't consider how the Law of Supply and Demand effects the Yield Curve. 

During the three years from 2004 through 2006, the global economy was also booming.  Foreign investors needed a place for their surplus profits.  And there was no better place then the US economy.

One explanation then for why the Yield Curve inverted is that as fast as the Fed was "drying up" investable funds by increasing short-term interest rates, the supply side of the market was being flooded with funds from foreign investors.  The result was short-term rates went up because of the Fed's actions, but long-term rates stayed low because the supply of funds kept increasing.

All this should have warned us that a "correction" was on the way.  It wasn't a question of "If," but "When?"  And sure enough, the excesses of too much cheap credit caught up with the housing industry and claimed another "victim," foreign currency exchange rates.   

If financial markets are "adjusting" and our theories still work, we would expect now to see a "normal" upward-sloping yield curve.  Let's look at the Yield Curve about a year later in December 2007...

That's more like it, isn't it?

Short-term rates are lower than what they were a year ago, but that's because the Federal Reserve System is trying to ward off the nasty effects of the "adjustment" we're going through and avoid the dreaded "R" word (recession).  But, best of all, the "big picture" looks "right" again.

Now, let's take a look at what the recent financial turmoil has done to the Yield Curve.   

Remember that Fiscal and Monetary policy actions are aimed at avoiding a slowdown by making credit available at affordable interest rates. 

And the "market" for this credit is businesses, consumers and financial institutions needing more cash in order to make loans.

What are the "take-aways" from all this?  As a future business manager, what can you learn to help you make good decisions?

One is that "abnormal" conditions (such as an inverted yield curve) produce abnormal results.  If something is "too good to be true, it probably isn't true."  Manage with a long-term perspective; don't get caught up in short-term frenzies that are this week's "once-in-a-lifetime" opportunity.

The last four years have also made it clear that monetary policy is an "indirect tool" and vulnerable to external forces.  At best, it takes six to nine months for monetary policy changes to work their way through the system.  Consumer and business spending patterns don't respond immediately after the Fed signals a policy change.  A message that the US economic policy is subject to factors outside its boundaries and control also comes through.  The implications of this new reality are not yet fully understood.    

Last, but not least, understand that while the nature of change can't always be predicted, the pace of change is increasing at an increasing rate.  When the economic historians assess the first decade of the 21st century, they may observe that policy-makers were caught off-guard by how fast and by how much a globalized economy can change.  Business managers will also have to re-double their efforts to keep pace with this 24/7/365 (366 in 2008) world that moves at the speed of light and with a click of the send key. 

As we discussed, the world of Macroeconomics, like the worlds of Physics and Chemistry, has laws that govern how things will happen.

The three that you need to know for our course, for your economics courses and future enjoyment are:

1. The Law of Demand: There is an Inverse Relationship between a Product's Price and the Quantity of that product that will be Demanded. Generally, more quantity will be demanded when prices are lower.
2. The Law of Supply: There is a Direct Relationship between a Product's Price and the Quantity of that product that will be Supplied. Generally, producers will supply greater quantities as prices increase.
3. The Law of Equilibrium Price: For all markets, there is an Equilibrium Price where the market Clears. Generally, a market's Equilibrium Price balances the quantity of a product supplied with the quantity demanded and there is no unsatisfied demand or no surplus or inadequate production.

Download this discussion of how markets operate in the world of Macroeconomics. It discusses - complete with graphs - how all this works. These are essential concepts that will need to be mastered as part of your business education. Download Macroeconomics' Laws of Demand and Supply