Wednesday, April 4, 2012
Class #19 Highlights
In this class, we concluded Judo with some practical examples and then we studied VC financing.
Our first practical example of Judo was Dell. Dell chose a niche strategy of operating only in the "direct" market. Initially, this consisted of phone and catalog sales and then later expanded to online sales. Dell also kept prices low, at least initially. It exploited pricing inflexibility on the part of HP, Compaq, and IBM. Owing to resistance from the retail channel, these firms could not price discriminate by channel. Dell then benefited from the fact that the online channel turned out to have meteoric growth, ultimately surpassing the retail channel as the main way people buy desktops and laptops.
We also studied Red Bull, who chose a niche channel (discos) and exploited a brand inflexibility on the part of Coke and Pepsi. To compete with Red Bull, they needed a brand that seemed dangerous, but maintaining separate brand images across channels is extremely difficult.
We then studied how competition and the form of the contract can help VCs sort out the quality of entrepreneurs' ideas. Several facts emerged from the discussion:
1. In a second price or English auction, it is a dominant strategy to bid up to the point where you are indifferent between winning and losing regardless of whether the auction is for cash, shares, or any other payment method.
2. The English and Vickrey (second price) auctions are strategically equivalent when bidders known their values.
3. In a first-price auction the bidding strategy was less clear. It involved a trade-off between bidding higher to win versus bidding lower to make more conditional on winning. How these two forces play out was a matter of dispute among the teams.