March 11, 2012

Fortune Favors the Bold

I've always believed the expression "Fortune Favors the Bold" and yesterday I was reminded of a good example from my life.

Carolyn had to take a long (1:40) lunch yesterday and asked me to come over to her store and go out to dinner with her (she was working the closing shift).  We went to Chili's over by the mall.  The business next door is a Starbucks that I've been in once.


Back in the summer of 2004 I was taking I believe it was a Business Management class at Boise State University.  We were starting the group project which was a weeks-long computer exercise selling shoes.  It was a complex project were groups of students had to make a large number of choices regarding their mythical shoe company.  These choices got fed into the professor's computer program and weekly responses (which represented an entire year's effort for the companies) let us know how we did.

The program simulated two product lines in a world-wide market: generic shoes and brand-name shoes.  Generics were the larger market and much easier to work with.  Basically there was a set market for generic shoes and which ever team had the lowest price got as much as that market as they could provide for.  If the price was tied, then the winner was whoever had the highest quality.  From what I remember if you could sell your shoes for $20 you were doing great, but $10-$15 was closer to the norm.  The brand-name market was quite complex.  You had to market regionally, bid for celebrities, figure out where to place your ads, and determine your pricing structure.  Any shoes that weren't sold in one year would lose some level of quality, but could be sold in the next year.

This was an eight week exercise and in the first week our group did the typical shotgun approach where we tried to do a little bit of everything.  This let us see where we stood up against the other groups.  The one special thing we did was invest heavily in production to create a higher quality shoe.  We were the only group to do this.  The results from the first week were pretty much "meh", which was to be expected.

My group met at this Starbucks to talk strategy for the upcoming weeks.  Nobody quite knew how to play this game and we had made several assumptions, the first being that the team that wins would be the one with the most money.  Other criteria were bantered around.  Most popular in terms of sale didn't make sense because generic shoe sales beat the brand name by the millions and if just on raw sales the brand name shoes could demand greater total prices.  We just figured that the team with the most money at the end would be #1.

I hit upon an idea that took some convincing for my group.  For the most part the base production stats for the groups were identical.  Groups had to determine how much to devote to generics and brand name and the rest were really marketing decisions more than anything.  I noted that as far as raw production went our group had the only distinguishing characteristic in that we made a higher quality shoe.  My idea was that we'd devote the entire production line and flood the market with shoes at cost.  As you might imaging this didn't go over very well with the rest of the group but I asked them to bear with me because I had a gamble.

Since we were only in week two and every group was in roughly the same place in this exercise we needed to do two things: 1) take advantage of the only distinguishing factor we had (shoes quality) and 2) be thinking one year ahead of everybody else.  What I proposed we do was announce to the rest of the group that the generic market was ours for the taking and that they could fight for the brand name market like the exercise seemed to be geared towards.  The whole program was (obviously) complex and we could circumvent things by being devilishly simple.

We sold every shoe we could produce in year two, making 0% profit.  I think the shoes cost around $8 to produce so even if someone to try us at our own game they would have had to lose money since at a tie we would win for quality.  If we ended up sitting on shoes because that happened, we'd still have better shoes for sale next year.  The other groups thought we were nuts, but we did have over 90% of the market.

What they didn't account for was that we had over 90% of the market....a market they didn't want.  In year three we did the unthinkable and set the price for our generic shoes at $100.  A couple of teams had token generic production runs and they sold all those shoes, but the other 80%....they bought $100 generic shoes.  We made bank in year three with a profit that exceeded all the other groups combined totals for the first three years.

The professor was as shocked as the rest of the groups were.  Obviously that trick would only work once, but it only needed to work once.  We had more money as a company that we knew what to do with.  By year four all of our competitors had to sell stock to raise the amount of funds needed to bid for celebrities and market regionally.  We thought we had it made in the shade....until the professor explained that the winners of the exercise were chosen by the computer and even he didn't fully understand the judging criteria.

Evidently everything was taken into account and our tactics would actually hamstring us because one judging criteria was stock price.  We didn't need to issue stock since we were flush with cash.  For weeks four through eight we got our celebrities, we marketed in Europe and Asia, and we even issued stock.  In the end we still had the most money of all the groups and arguably were the most successful, but we came in second place.

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