Stanford Business School

I found this awesome video on Youtube called “Everything I Learned at Stanford Business School in 28 Minutes”.

Basically, the video starts by talking about this fancy concept called “Porter’s 5 Forces” which refers to the 5 key elements that affect company operations.

These 5 forces are:

1. Competition (how strong the competition is)

2. Substitutes (how many substitutes for a given product exist within the market)

3. New Entrants (likelihood of being disrupted by new entrants)

4. Buyer Power (how much buying power customers have over you)

5. Supplier Power (how much power your suppliers have over you)

The author of the video uses Apple as an example to delineate these forces… Apple has tons of competition, eg Samsung, Microsoft, Google, etc and tons of substitutes due to the fact that the competitors are some of the biggest corporations in the world. But what Apple does to counteract those forces and their competition lay in their ecosystem; where an Apple phone, computer, and headphones can all be connected to one iCloud account.

So Apple uses what’s called “Ecosystem Lock-in” to defend against competitors & new entrants alike. Coupled with the scale and control over their supply chain, it would be very difficult for an incumbent to compete with Apple, EVEN IF they deliver a superior product; because remember, the user experience goes beyond just use of the product. It’s about how the product is integrated into the broader lifestyles of their users.

So this brings us to the force of Supplier Power, where Apple’s suppliers don’t actually even have a lot of negotiation leverage because Apple sells at such a scale that they can pull off mega profitability at mega low margins.

Companies like Apple & Boeing become more efficient at scale. The same fixed cost of building a factory in which to build a plane is the same fixed costs when that factory builds two planes (or five hundred planes per year). This principle is what’s commonly referred to as “economies of scale” and it goes hand in hand with another type of competitive advantage; “competing on cost”.

Competing on cost is where companies like Walmart or Amazon sell goods at the lowest cost to suffocate the competition that exists in that market.

Another type of competitive advantage is “market innovation” and instead of typing 3 lines about what that is, just consider Tesla. The author says, “If you’re talented enough to innovate within a given market, you can create a blue ocean of uncontested space”. Tesla was the first to bring mainstream electric vehicles to the market and as a result they enjoyed a decade of total market domination before any competitors caught up.

Some other types of competitive advantages include:

• IP Rights

• Customer Experience

• Government Regulation

• Higher Quality Products

• Exclusive Partnerships

• Sustainability

• Vertical Integration

• Network Effects

The Author focuses on Network Effects because it’s supposedly one of the most clever advantages and “creates a self-reinforcing moat around your business”.

Network Effect: where the more people that become added to a network, the network itself becomes inherently more valuable.

Consider the telephone when AGB first invented it… It was really only as valuable insofar as the number of people you would call who also own a telephone. So the more people who buy phones means the more valuable it is to own a phone. This is precisely the reason why it’s so difficult to build new social media apps. The amount of people currently on Instagram and TikTok is so large that the amount of time & money required to build a new app to the scale of regnant social media platforms would be an uphill battle to say the least. The only real way to compete would require a vastly superior product that would make someone feel silly not to replace what they’re currently using for the new, better solution.

Takeaway #1: Always start by solving someone else’s problem.
This is the difference between starting with a perfect idea and then executing vs. solving a problem to fast-track your realization of the best possible solution.

Takeaway #2: Iterate.
Apparently in Stanford Business School, they teach this by suggesting to start by serving a super early niche product and solving their problems before methodically expanding. It’s about using a super niche problem/market as an “entry wedge” into broader expansion.

But what’s important to remember on this point is that building a great product is never enough, and the #1 mistake entrepreneurs make is ignoring marketing.

Wanna get good at marketing? Easy, just hone in on your ICP (Ideal Customer Profile). An ICP isn’t just another dumb term people pretending to sound smart use, it’s actually fundamental to distribution/getting product in hand. A crude example of this might be something like “weight loss” vs. “weight loss in just 15 minutes per day for single mothers who work in finance”. The marketing you create to target that persona will be much more likely to get them to click or pay attention as opposed to a generic ad or marketing message that speaks to everyone, AKA no one.

Taking it further, when you focus on your ICP you can more effectively allocate marketing dollars and media efforts based on the understanding you’ve gained about where your ICP spends time, where the y consume content, what is holding them back, what their unique motivations look like, etc. For example, you can co-market and/or advertise in social platforms that your ICP tends to be on, newsletters they tend to read, and doing so in the lingo that is used by said ICP.

Takeaway #3: Meet your ICP where they’re at.
In a nutshell, the key point here is to understand who your key customer base is, where they spend time, what motivates them to take action, what they perceive to be holding them back, how they speak, what they care about - and to use this information to target them with specific messaging that resonates with them. In other words, it’s marketing 101.

That takes us to the next concept; Financial Analysis.

Financial Analysis: determining the value of an asset by projecting the potential amount of money that asset will generate in the future. This really boils down to Revenue, Expenses and Profit.

3 Financial Statements:
1) Income Statement (revenues minus expenses equals net income)
2) Balance Sheet (what is owned and what is owed. AKA cash and liabilities)
3) Cash Flow Statement (where the company spent and earned cash)

What a Financial Analyst does with these statements:
They use them to project the business through a financial model. The “projection” is also why finance aficionados will say stuff like “it’s just as much an art as it is science to predict how a company will pan out”.

At this point in the video, the author breaks out a spreadsheet and starts talking about what seems like quantitative wizardry, talking about how financial analysts go through the numbers to make valuations.

Key Learnings:

• Present Value = Discounted Value of All Future Cash Flows

• The Higher Quality the Business = Higher Valuation

Ok so why does Stanford see such a higher valuation compared to literally every other business school on the planet?
According to Stanford, it’s because of their secret sauce; “Touchy Feely” or simply put; emotional intelligence.

What is touchy feely emotional intelligence in this case? It’s asking yourself (and others) why the numbers are the way they are and what actually causes those numbers to be “those numbers”. For example; “what caused Starbucks’ direct to consumer revenues to decline from year x to year y?”.

And this really boils down to how effective the people who comprise the company are in that business… AKA, it boils down to things like:

• Self-awareness of negative emotions and how that affects co-workers and partnerships

• Ability to self-regulate those emotions

• Empathy (how can we help those around us to do their job better or more effectively)

• Ability to inspire & motivate others around them in order to reach new heights collectively

Ok, so that’s the jist of what Stanford is teaching in business school. Not really, but it does beg the question; with so much information shared from trusted institutions online for free, is the valuation of elite education likely to decrease, remain stable, or increase?

Personally, I feel like the elite institutions with prolific global appeal (such as Stanford) will remain highly valuable, but not just for it’s product. I think these elite universities wil remain valuable, instead, for their network effect and brand appeal.

At a university like Stanford, Yale, MIT or Harvard, not only are students given the luxury of networking amongst highly intellectual like-minded people and take advantage of prestigious professor networks, they also realize a return on that education given the ease of finding lucrative opportunities solely thanks to the brand appeal.

So if you can get into a school like Stanford, you probably should, but not because you won’t be able to learn that same information elsewhere, but because of how their networks & brand appeal allow students to leverage those learnings.