Key Strategies from Stanford Business School

Stanford Business School is the top business school in the entire world. But the problem is, every year they let in just 400 students. Which means that unless you're one of those lucky 400 students, you are gatekept from the education they teach that has minted dozens of billionaires. And I don't think that's right. So over the next 30 minutes, I'm going to teach you everything that I learned at Stanford from how do you build and start a billion-dollar company, all the way to how do you analyze a stock like a hedge fund investor. And so if you just power through this video, like I know it's gonna be pretty long, I'm gonna try my very very best to save you two years of your life and $250,000 in student loans. So why don't we dive in? So the first thing I'm going to teach you is going to build the foundation for the rest of your career. And it's also the most important thing you learn in business school, which is strategy. A.K.A. what is your game plan for building the next Apple or the next Facebook or the next Nike? And how you learn this in business school is you study the strategies and the tactics that all these billion dollar companies use to absolutely crush the competition. And the best way to start learning good corporate strategy is to use a framework we learned in business school called Porter's Five Forces. And basically all this is is just five different forces that interact with a company and help you decide how strong a company actually is. And those are, number one, how strong your competition is. Number two, how many substitutes to your product are there in the market? And then number three is how likely are you to be disrupted by new entrants? Then number four is how much buying power do your customers have over you? And then lastly, how much power do your suppliers have over you? And so I figured one of the best ways for us to understand this model is to use it to analyze one of the companies that you and I likely use every single day, which is Apple. So first, if we look at Apple's competition, it's actually pretty tough. You've got Samsung, you've got Google, you've got Microsoft, they're all serving different products that Apple also serves. And these are some of the strongest companies out there in the world, which means that there are a ton of high quality substitutable products out there, whether that be the Samsung Galaxy for phones, whether it be Microsoft Windows for computers, or even Facebook's MetaQuest when it comes to competing on VR. And so immediately when you look at these two aspects of Apple's business, you're like, this is pretty stiff competition. And you start to realize what Apple does to fend off the competition, which is with their ecosystem. AKA, I could go get a Samsung Galaxy phone, but not only do I love the Apple iPhone, but it syncs to my Mac. I have AirPod Pros that seamlessly integrate with my phone. I use iCloud for all of my photos, and we all have that one iPad we bought five years ago that we don't use anymore. Point being, Apple uses ecosystem lock-in to actually defend against not only its existing competitors, but also new entrants. And I would actually say that Apple's threat of new entrants is incredibly low. Because not only do you have this ecosystem lock-in, you also have to think about how much scale Apple has in delivering an incredible supply chain of millions of high-quality phones around the world every single day. Like, building that manufacturing process and that supply chain would be incredibly difficult and so, so, so costly for any new entry. And all this then leads us to think about the buyer power of all of Apple's customers, aka you and me, where if you think about it, yes we could go buy an android phone or we could go buy a windows computer but do we actually want to be the person who ruins the group chat and so all that being said if all of us want to buy an iphone then apple's suppliers aka the people who make the parts and materials of an apple iphone don't actually have too much negotiating leverage because apple does so much volume they're actually able to negotiate really razor thin margins on all of their costs so that apple can make more money. And so now that we've surveyed the scene around Apple as a company, we can then dive into the really fun part about strategy, which is figuring out for your company, what are your strengths, weaknesses, and therefore competitive advantages that you can use to win the market. And so when you're a company like Apple generating billions of dollars of profit, and you have all these competitors trying to come eat your lunch, you start to realize some of Apple's competitive advantages. Number one being its phenomenal brand. Like everyone out there knows the Apple brand. And in fact, if you think about an Apple ad, like you actually feel something when you watch it. that. Like when you think phone, you immediately think Apple because it stands for something. And so if you think about it, there are a ton of other companies who use brand as one of their competitive advantages, where if I just put up some blank logos here, I bet you immediately recognize that this This right here is going to be McDonald's and this right here is going to be Nike. They live in your head rent free. But that's not the only approach companies can take to actually have great branding as a competitive advantage. Because when you think about Patagonia, for example, as a brand, they actually use brand to resonate with you as a customer on a values level where I'm actually much more likely to buy a Patagonia jacket because I know they stand for something that I personally believe in. So I think Patagonia's approach to sustainability. I as a customer actually feel better when I purchase it in kind of actually the same way that whenever I watch Red Bull content, which is a branding play, I actually feel this aspiration to be as cool as some of the Red Bull athletes. And all of that, even within brand competitive advantage, Which is different from the reputation play, where when you think Goldman Sachs or you think McKinsey, you think the very best of the best, which is their brand when it comes to investment banking or consulting. And so when you start realizing that building a brand is one of the competitive advantages that your company can have, it creates a whole list of other competitive advantages that you need for your company. And continuing down that list is another concept called economies of scale, where basically there are a lot of businesses out there where as they actually get larger or they have more scale, they actually get more efficient. So when you think about the Apple example with producing iPhones, or you think about Boeing producing mega planes, you realize that they actually become more efficient once they start producing more, right? Because the cost of producing one plane when it comes to building an entire factory to support that is the same fixed cost as building that factory to support building a thousand planes. And so over time, ideally your business, as it becomes more and more successful, actually gets more and more efficient as well. And this competitive advantage around economies of scale actually goes hand in hand with another competitive advantage that is called competing on cost. Where when you think of the Walmarts or the Amazons of the world, they've built multi, multi-billion dollar businesses, basically being the cheapest cost alternative for anyone out there in the market. Where Jeff Bezos actually has this really smart quote that he says, which is back in the day when he started Amazon, he knew that he couldn't predict the future, but he knew the one thing to be true is that people would always want lower and lower prices. And so if you're thinking about using this competitive advantage for your company, I want you to think about this flywheel that Jeff Bezos once drew on a napkin, which is he realized that there was actually a virtuous cycle at play where if he could lower prices, he'd actually generate more volume and more net revenue over time, which means he could keep pouring that back into the business to keep lowering prices over time and keep making more and more sales. And he paired it with another competitive advantage, which is just, innovating in a market where when you think about a hyper successful company like Tesla, for example, it's very clear that they innovated in an otherwise incredibly old and incumbent filled market. And so if you're one of those really talented entrepreneurs and you can innovate in a market, you'll realize that you can actually create a blue ocean of uncontested space where when you think about Tesla, because they were the first people to bring electric vehicles to the mass market, They basically had years on end to completely dominate that market before any other competitors caught up. Now, there are a ton of other competitive advantages that I'll list over here, whether it be intellectual property rights or actually using government and regulation as a barrier to entry for your competitors. But the last competitive advantage I'll share with you is actually what I think is the most clever one, because it builds a self-reinforcing mode around your business. And that, my friends, is something called network effects, where basically the concept of a network effect is that whenever you add more and more people to a network, network. The network itself actually inherently gets more and more valuable. Where if you think about actually the first telephone back in the day, if no one else had a telephone, having the first telephone actually wasn't very useful. But as soon as you add another person with a telephone, you actually get to call that other person and it has some use. But then think about it, as you add even just one more person, that's net more beneficial to both of the people already in that network. And so when you add a bunch more people to a network, It actually gets increasingly more valuable for every single person that joins into that network, which ultimately ends up building this incredible moat around your business, where if you think about it, the reason why it's so hard to build a new social media app that actually breaks out is because everyone's already on Instagram or everyone's already on TikTok, and they're likely not going to leave for your new platform because you don't have the network built yet. And so now that you have a good sense of what strategy you might be able to use in your business. Now it's time to talk about the number one thing that's actually most important for your business itself, which is making sure that you have a incredible product that people actually want to buy. Now, whenever I hear this term product, I'm kind of scratched my head because it's such a nebulous abstract term like what is a product. But basically, a product is just the core of your business, aka whatever you actually sell. So whether that's the cars or the t-shirts you're producing, the software you're selling, or even the service that you're providing other people, this is the thing. thing that people actually give you money for. And so what you learn in business school is how to avoid an outcome like a Microsoft Zoom or even a Google Glass versus having an incredibly successful outcome like an Apple iPhone. And there are just two things here that you guys need to take away in order to build your million dollar or billion dollar startup idea. That is number one, to always start with solving someone else's problem. Because if you start problem first, rather than idea first, so for example, you really hone in on helping someone figure out the best way for them specifically to lose weight versus just projecting your idea of what you think is best for them, then you ultimately get to the to the maximal best solution for that particular customer. And that's of course though, if you do number two, which is to iterate. Now, what I mean by iterate is that if you think about every incredible product out there, they didn't just come out of the womb incredible. You always have to work and improve on something over time, oftentimes years for something to be a world-class product. And so the iteration method you learn in business school is actually to start with a super niche early product, serving a super niche customer, before very slowly over time you actually expand. And so for example, maybe you have this idea that eventually all commerce is going to move online. And so you ask yourself, how can I actually start really small before going really big? And you realize that, hey, it's really hard to get the book that I want at a physical bookstore. And so what if I actually put a bookstore online for really cheap prices? And so you launch this first version of your app or your site. And because you're a cunning business person, you start asking all the people who Visit your initial version of the site what they actually like about your site and your service and you hear from them a couple things Which is number one. I love the unlimited selection number two I love how cheap things are and then number three I just love the convenience of how this thing shows up in my door without me having to do anything and so you the smart bald entrepreneur that you are Start to realize oh, I should specifically improve those specific attributes about my online bookstore where I should actually get shipping down to just two days I should keep lowering my prices and I should add more and more selection over time where I'm just gonna start with perfecting an online bookstore but slowly and methodically I'm gonna add tangential products that I know my existing customer base will like like maybe t-shirts one day and then maybe skincare and then maybe dominating the entire world of e-commerce one day and so the main learning I want you to take care in terms of how to build an incredible product that people literally rip off the shelves is by first starting with as really small niche folks and really delighting them and using them as an entry wedge or a landing before you expand really thoughtfully over time but of course you learn that building a great product is never enough and that the most successful businesses avoid the number one mistake most entrepreneurs make pretty early on which is they don't think about marketing. So there's a bunch of boring marketing concepts out there that I'll throw on the screen around here, but there's actually just one thing that I think you need to be really good at marketing. And that is by focusing on this term you learn throughout your time at business school, which is an ICP. And that just stands for ideal customer profile. But let me break down for you why this really boring buzzword is actually crucial for your success if you actually want to crush it. So let's play out another example where let's say you want to start a weight loss business. Now the typical first time entrepreneur will go out there and be like, I'm just gonna try to help everyone to lose weight because that'd be cool and I can build a really big business as a big market. But I want you to think about all of the competition out there and how if you're a jack of all trades, then you are a master of none. Whereas instead, if you were to get hyper, hyper intentional and hyper specific about the ideal customer you would like to serve. So for example, you could say, I wanna specifically help moms who have kids who are also trying to balance a job lose weight. Then I want you to think about how much more successful you'll be saying, hey. everyone I love to help you lose weight versus hey if you're a mom who's struggling about being present for your family taking care of that home and also paying the bills and then actually taking care of your body and losing weight I specifically have built a program just for your lifestyle like you can already feel which one you're more likely to purchase if you're that mom and that's compounded even more because you've also through this video learned another concept about marketing that's super important which is channel now what I mean by that is you want to be hyper efficient in your marketing. Like you don't want to spend money on a big TV ad if you're targeting Gen Z because they don't watch TV, boomers do. But because you know Jane really well, you know all of her habits, you know what she consumes and cares about, you know that she spends a ton of time on Instagram, she follows a ton of mommy bloggers and influencers, and she spends a ton of time in her local community. volunteering at the PTA events. And so you can now take your hyper optimized ad copy that really helps her feel seen and also put it in the specific distribution channel where she's actually hanging out. And so I'll throw up a bunch of different distribution channels here that you can use for your business. But the main thing to take away here is really understand your customer's marketing message that's going to resonate with them and then meet them where they're at. All right. How are we feeling? Because we are now halfway there. And because we've learned the fundamentals of building a great business. we now get to instead turn into Wall Street investors. Also, I'm really excited to teach you guys this because we all know that one douchebag who works in finance and thinks they're hot shit. And I'm basically gonna condense down for you their entire job in just a few minutes so that you know just as much as them. So basically, financial analysis is just this really fancy term for saying, deciding how much a certain business or an asset is actually worth. And you do that by trying to guess how much money or how much cash an asset or a business will generate in the future. And that's how you. you get to statements like, oh, I think this stock is overvalued or undervalued. And so if you think about it, and you really oversimplify the equation, that really just boils down to caring about three main things, which is number one, how much revenue you're making. So how much money is coming in the door? Number two, how many costs you have, like what are your expenses? So how much money is leaving the door? And then number three, when you subtract your cost from your revenue, getting to your profit, or the cash that you actually get to keep, and then how much of that you think you'll make over time. And you can find this information for any companies. out there by using something called the three financial statements. And I figured because I had Starbucks this morning, why not actually pull out Starbucks's financial statements and actually analyze them as a business. So for any mature business out there, you have three different kinds of financial statements. Number one is the income statement. Number two is the balance sheet. And then number three is the cash flow statement. And just as a quick caveat, there are a ton of nuances I'm going to skip over here because I'm really going to focus on just giving you the foundation that you can start learning from. So your income statement is just that really simple equation I showed you before, which is basically all of your revenues minus your expenses, which then turns into the profit you made during this financial period. So in Starbucks'case, you actually see that they have three different kinds of revenue that they report. Number one in their biggest bucket, which generated $29 billion in sales, is the company owned Starbucks stores out there. So just your regular run of the mill Starbucks stores that you and I go to all the time. Then they've also actually got a couple of franchise stores where other people actually run those stores for them. And that's still generating them $4.5 billion in revenue. Now, on top of that, Starbucks also has this line item called other revenue, which is things like their direct-to-consumer and actual coffee brands that you can actually purchase yourself. And so that all sums to a net revenue of almost $36 billion in their fiscal year 2023. Now, you'll see underneath Starbucks'revenue, they start to plot out all their different costs and expenses, but there are a couple main line items when it comes to expenses that I want to teach you guys about. Number one is just your cost of goods sold. So like when Starbucks serves you a cup of coffee, what are the costs that they incur with that cup of coffee? of coffee, like what was the cost of literally the coffee beans of the person making that coffee of the literal coffee cup itself, because that actually gets you to your gross profit or gross margin of how much money they actually make for every cup of coffee they sell. And that's a different kind of cost than a sales and marketing costs where let's say Starbucks decides to run a huge ad campaign. They have to spend money on that. And that is a line item within sales and marketing. And that kind of expense is really different from a whole nother kind of expense line item called research. development, where Starbucks is pouring in millions of dollars a year to figure out what is their next pumpkin spice latte. And then lastly, Starbucks also just incurs a ton of costs to run the company itself, right? Like to pay the corporate employees to figure out how to run this business also costs them salary dollars. And so that's all bucketed within something called general and administrative expenses that pretty much every company out there has. And so that's pretty much the income statement in a nutshell, where that actually sets you up pretty well for the cash flow statement, which is really just a picture of where specifically a company sits. spent and actually made cash from. And the reason why this is actually different from your income statement, because you think like, oh, like. the money you made and the money you spent is how much cash you have is because in a given year for starbucks for example yes they might make a certain amount of profit but they're also spending cash elsewhere to for example invest in the business where for them they actually spent an additional 2.3 billion dollars in cash to invest in new property plants and equipment so actually in their manufacturing process or to build new stores and you'll also see companies raise more equity or raise debt or pay down debt which leads to different cash flows in their financing activities, which is another bucket of your cash flow statements, which ultimately leads you to see that even though Starbucks generated a profit on their income statement of $4.1 billion, at the end of that financial period, because they had invested in so many new things, they only had a net addition of $730 million in cash for that period. And now that all leads us to the final statement here, which is our balance sheet, which is basically just a picture of what we own and what we owe on a certain day and time. And so for Starbucks, on its balance sheet. So what it currently owns, it has over $3.5 billion of cash. It has a ton of different stores and manufacturing plants, which are assets that it owns while also having liabilities, AKA things that they owe other people, whether that's paying down debt or paying down a certain vendor for providing them some sort of service. And so you see all of that on the balance sheet here to understand. okay, what does this business have and what does it owe? And so basically what an investor or financial analyst does is they take these statements and they use these to start projecting out the business through a financial model. And for that, we need to break out our Excel keyboards and pop off our F1 keys. Also, we need to literally bring an entire computer here that actually has Excel on it. So basically what you guys will see here is I've laid out a pretty simple financial model for Starbucks where you'll see the same line items that we had before, but laid out in a more organized way where you have. your revenue you have your cost to get sold your cogs you break out your gross profit your gross margin and then also all the operating expenses i mentioned before to eventually get you to the net income or the cash flow of this business but what's different about this model here is you'll note that i've put in their historic numbers but then also added projections and so this is where financial analysts will be like oh it's as much an art as it is a science to predict how a company does in the future and so your job as an investor is to really try to figure out and be the best guesser at how much you think this company is going to grow and at what expense rate where for me just for illustrative purposes here i've just assumed a really steady rate of growth But if you think about how the income statement all works together and how you think about the drivers of a business, so what are the levers you can pull to grow a business, you could say instead that maybe in 2024, you actually believe that Starbucks will actually grow even higher in terms of its rate of growth, because you think they're going to run some big sales and marketing campaign or some big brand campaign. And so you will see that trickle down into the revenue, but also you'll need to update here your sales and marketing expense to actually be higher because they're running another campaign. All that to be said, there's a lot of wizardry and a lot of this to figure out how to actually project out the cash flows of business. Because if you'll remember, in order to ascertain the value of an asset or a company in this case, the present value or the price you'd want to pay today for this asset is really just an estimation of all of its future cash flows discounted back to today. And so stay with me here because I know I just use a lot of random buzzwords and terms. But basically, the reason why I said the term discounted is because if you think about it, Yes, if you were to buy this company today, it would generate some amount of cash in two or three years, but that cash that it generates in the future is actually worth less than that same cash amount today. And what I mean by that is something that we call the time value of money. Basically, cash today or cash now is worth more than that same amount of cash in the future because you could actually just go invest that cash now, let's say at a 10% interest rate or a 10% return in the stock market, and therefore... the billion dollars of cash that i'm projecting out that starbucks will generate me next year well that's the same thing as having about 900 million dollars today and so in order to calculate the intrinsic value of an asset you basically project out these cash flows and then you discount them back to today by some sort of discount value which is generally the market rate of return let's just assume 10 here and that will give you the theoretical intrinsic value of your asset and this specific methodology of how you value a company is what we call the discounted cash flow analysis. And so generally actual practitioners in finance won't really use DCS as much in terms of actual day-to-day work. And instead they'll use something called a comparables analysis, where here you'll see I've laid out a bunch of other comparable companies to Starbucks. So McDonald's, Domino's, Chipotle, Yum! Brands that owns KFC and Pizza Hut, and actually laid out their stock price, their earnings, and then a bunch of things called multiples, where basically the intention here is to see where a lot of comparable companies to Starbucks are trading and then using that as a framework to decide on the valuation for Starbucks. Where I can actually take a look at McDonald's metrics and say well McDonald's is trading at a 25 times price to earnings multiple, which basically just means its earnings stands for net income. The total price of McDonald's if you were to directly buy the whole company is 25 times that of how much net income it generated this year. Whereas if I look at Chipotle, which is a much higher growth stock with some more interesting fundamentals, it actually is trading at a much higher price earnings ratio of 60 times because the market seems to like the fundamentals of this business more you could actually use those kind of as guardrails to decide where you should actually put starbucks within that mix like what is their price earnings ratio that makes sense and basically in order to decide what multiple makes sense to apply to any company or starbucks in this case an investor is going to look at all these different qualitative or quantitative measures to your business so for example they'd look at porter's five forces and think about your competitive dynamics and Also, how much are you innovating? Or maybe they'll give you a premium in your multiple because they're a huge fan of the management team or the founder that's running the business. So say someone, for example, as inspirational as Steve Jobs. And then on the quantitative side, They're going to look at things like what are your unit economics as compared to everyone else? Like, are you running more efficiently than your peer set? And so basically, an investor is going to take all of these quantitative and qualitative inputs and out decide some sort of multiple for your business, which in this case, Starbucks and McDonald's are actually pretty similarly valued at 25 times price earnings, which makes intuitive sense to me because they're operating at similar market sizes, similar scale and also just similar margin. And so to try to summarize an incredibly complex and nuanced industry like finance in just a couple sentences, these are the key things that matter for you when you think about financial analysis. Number one is that the present value or price that you should theoretically pay today for any asset out there is just the discounted value of all their future cash flows. And you can find a company's historic cash flows through its financial statements, which then you can then combine with all of your different qualitative pieces of research around the company's market size, their company's margin structure, company's competitive differentiation, or the company's competitive landscape and any new entrants coming in to decide how to project out its future cash flows to actually figure out that valuation. Congratulations, if you've made it this far, you're now at the final and actually most valuable part of the video, which is to cover the real secret sauce of the Stanford Business School education and one of the main reasons why they're ranked over all the other business schools. And Stanford calls this learning the touchy-feely and here we'll call it growing your emotional intelligence. And before you're like, oh John, This sounds super woo-woo, like how is this going to affect my business? I want you to think about if you don't grow in these specific skills I'm about to list, how much money you're going to lose. So the mistake that I used to make back in the day when I was just working in finance and just seeing the numbers was that I didn't think through the fact that all these numbers are on revenue or cost or expenses. What actually makes up those numbers? And if you think about it, the first principles core driver of how much revenue you make or how much money you're spending, is how effective your people are in your business. So I want you to think about that one bad manager you've had. And then I want you to think about all of the skills that build up into someone who is emotionally intelligent. Self-awareness around recognizing the stresses and frustrations that happen to all of us in our day-to-day jobs. And then self-regulating those emotions so that you're not taking it out on your people when you're having a bad day, you treat one of your employees poorly. And then beyond that, harnessing empathy, where your manager should ideally... understand the emotions and struggles you're going through so that they can actually do their job properly, which I believe is to help you do your job as successfully as possible. And then the last piece here that separates a decent manager from an incredible leader is their ability to inspire and motivate you. Because we all had that one coach or manager who pushed us and inspired us to do something that we didn't even think we were capable of. And so when you think about that awful manager that you had, you start to realize, wait a minute, that's why I stopped working as hard for this company. And That's why I actually left this job. And all of the value that you brought to this company, because someone just decided not to care about someone else in terms of their feelings and how they felt, that company literally lost hundreds of thousands of dollars that will trickle down right to its P&L. And so if there's just one mental model I'll give you on how to be a good manager and a good leader, it is this specific quote, which is, if they win, you win. Basically, when you think about the managers or leaders you've respected the most, there's this general feeling that you realize that they just don't know what to do. genuinely care about you as a human being and your success. Because a good manager will sit down with their reports and literally ask them, hey, what are you interested in working on? What are you interested in growing in? What gives you passion? And they'll lay out those goals with you and align those with the organization's goals. And the coolest thing that we actually learned in our studies was that servant leaders and leaders that were conscientious over other people's emotions were significantly more likely to drive more revenue for their businesses. Because if you think about it, if you actually have a manager who puts their team... team into positions of success where that team actually loves coming into work every day so they're probably working more and they're much more passionate about their job even if it's just like a marginal difference that means your team is more marginally likely to come up with that next 10x or 100x creative idea that is your next billion dollar business. And so the one clear takeaway I've taken into running my own business is that if you serve others, you serve yourself. Now, I wish I could say you just got the full value of a Stanford Business School MBA. But there's actually one thing that I believe is probably the most valuable part of the Stanford Business School education that no matter how hard I try in a video, I can't get to you, which is specifically the relationships you build in your business school class. Because if there's one thing I've learned having grown up with absolutely no connections, it's that your network is your network. net worth. Because when you think about the alumni database that you get access to as a business school alum, and you realize that unfortunately the way society works is that the more people you know who can connect you with more resources and opportunities, the more likely you are to be successful. It actually gets pretty frustrating for someone who grew up with absolutely no connections. And so the next video I'll work on for you guys is how I was able to build a network having grown up with zero connections. And so if you don't want to miss that, make sure to subscribe. But I will say in the meantime, that if you just just follow all the skills that you learned in this video and you just iterate and you just persist, you will organically have so much business success over the long term that you will just organically build this kind of network.

And I don't think that's right. So over the next 30 minutes, I'm going to teach you everything that I learned at Stanford from how do you build and start a billion-dollar company, all the way to how do you analyze a stock like a hedge fund investor. And so if you just power through this video, like I know it's gonna be pretty long, I'm gonna try my very very best to save you two years of your life and $250,000 in student loans. So why don't we dive in?

So the first thing I'm going to teach you is going to build the foundation for the rest of your career. And it's also the most important thing you learn in business school, which is strategy. A.K.A. what is your game plan for building the next Apple or the next Facebook or the next Nike?

And how you learn this in business school is you study the strategies and the tactics that all these billion dollar companies use to absolutely crush the competition. And the best way to start learning good corporate strategy is to use a framework we learned in business school called Porter's Five Forces. And basically all this is is just five different forces that interact with a company and help you decide how strong a company actually is.

And those are, number one, how strong your competition is. Number two, how many substitutes to your product are there in the market? And then number three is how likely are you to be disrupted by new entrants? Then number four is how much buying power do your customers have over you? And then lastly, how much power do your suppliers have over you?

And so I figured one of the best ways for us to understand this model is to use it to analyze one of the companies that you and I likely use every single day, which is Apple. So first, if we look at Apple's competition, it's actually pretty tough. You've got Samsung, you've got Google, you've got Microsoft, they're all serving different products that Apple also serves.

And these are some of the strongest companies out there in the world, which means that there are a ton of high quality substitutable products out there, whether that be the Samsung Galaxy for phones, whether it be Microsoft Windows for computers, or even Facebook's MetaQuest when it comes to competing on VR. And so immediately when you look at these two aspects of Apple's business, you're like, this is pretty stiff competition. And you start to realize what Apple does to fend off the competition, which is with their ecosystem. AKA, I could go get a Samsung Galaxy phone, but not only do I love the Apple iPhone, but it syncs to my Mac.

I have AirPod Pros that seamlessly integrate with my phone. I use iCloud for all of my photos, and we all have that one iPad we bought five years ago that we don't use anymore. Point being, Apple uses ecosystem lock-in to actually defend against not only its existing competitors, but also new entrants.

And I would actually say that Apple's threat of new entrants is incredibly low. Because not only do you have this ecosystem lock-in, you also have to think about how much scale Apple has in delivering an incredible supply chain of millions of high-quality phones around the world every single day. Like, building that manufacturing process and that supply chain would be incredibly difficult and so, so, so costly for any new entry.

And all this then leads us to think about the buyer power of all of Apple's customers, aka you and me, where if you think about it, yes we could go buy an android phone or we could go buy a windows computer but do we actually want to be the person who ruins the group chat and so all that being said if all of us want to buy an iphone then apple's suppliers aka the people who make the parts and materials of an apple iphone don't actually have too much negotiating leverage because apple does so much volume they're actually able to negotiate really razor thin margins on all of their costs so that apple can make more money. And so now that we've surveyed the scene around Apple as a company, we can then dive into the really fun part about strategy, which is figuring out for your company, what are your strengths, weaknesses, and therefore competitive advantages that you can use to win the market. And so when you're a company like Apple generating billions of dollars of profit, and you have all these competitors trying to come eat your lunch, you start to realize some of Apple's competitive advantages.

Number one being its phenomenal brand. Like everyone out there knows the Apple brand. And in fact, if you think about an Apple ad, like you actually feel something when you watch it. that.

Like when you think phone, you immediately think Apple because it stands for something. And so if you think about it, there are a ton of other companies who use brand as one of their competitive advantages, where if I just put up some blank logos here, I bet you immediately recognize that this This right here is going to be McDonald's and this right here is going to be Nike. They live in your head rent free.

But that's not the only approach companies can take to actually have great branding as a competitive advantage. Because when you think about Patagonia, for example, as a brand, they actually use brand to resonate with you as a customer on a values level where I'm actually much more likely to buy a Patagonia jacket because I know they stand for something that I personally believe in. So I think Patagonia's approach to sustainability.

I as a customer actually feel better when I purchase it in kind of actually the same way that whenever I watch Red Bull content, which is a branding play, I actually feel this aspiration to be as cool as some of the Red Bull athletes. And all of that, even within brand competitive advantage, Which is different from the reputation play, where when you think Goldman Sachs or you think McKinsey, you think the very best of the best, which is their brand when it comes to investment banking or consulting. And so when you start realizing that building a brand is one of the competitive advantages that your company can have, it creates a whole list of other competitive advantages that you need for your company.

And continuing down that list is another concept called economies of scale, where basically there are a lot of businesses out there where as they actually get larger or they have more scale, they actually get more efficient. So when you think about the Apple example with producing iPhones, or you think about Boeing producing mega planes, you realize that they actually become more efficient once they start producing more, right? Because the cost of producing one plane when it comes to building an entire factory to support that is the same fixed cost as building that factory to support building a thousand planes.

And so over time, ideally your business, as it becomes more and more successful, actually gets more and more efficient as well. And this competitive advantage around economies of scale actually goes hand in hand with another competitive advantage that is called competing on cost. Where when you think of the Walmarts or the Amazons of the world, they've built multi, multi-billion dollar businesses, basically being the cheapest cost alternative for anyone out there in the market. Where Jeff Bezos actually has this really smart quote that he says, which is back in the day when he started Amazon, he knew that he couldn't predict the future, but he knew the one thing to be true is that people would always want lower and lower prices.

And so if you're thinking about using this competitive advantage for your company, I want you to think about this flywheel that Jeff Bezos once drew on a napkin, which is he realized that there was actually a virtuous cycle at play where if he could lower prices, he'd actually generate more volume and more net revenue over time, which means he could keep pouring that back into the business to keep lowering prices over time and keep making more and more sales. And he paired it with another competitive advantage, which is just, innovating in a market where when you think about a hyper successful company like Tesla, for example, it's very clear that they innovated in an otherwise incredibly old and incumbent filled market. And so if you're one of those really talented entrepreneurs and you can innovate in a market, you'll realize that you can actually create a blue ocean of uncontested space where when you think about Tesla, because they were the first people to bring electric vehicles to the mass market, They basically had years on end to completely dominate that market before any other competitors caught up.

Now, there are a ton of other competitive advantages that I'll list over here, whether it be intellectual property rights or actually using government and regulation as a barrier to entry for your competitors. But the last competitive advantage I'll share with you is actually what I think is the most clever one, because it builds a self-reinforcing mode around your business. And that, my friends, is something called network effects, where basically the concept of a network effect is that whenever you add more and more people to a network, network. The network itself actually inherently gets more and more valuable.

Where if you think about actually the first telephone back in the day, if no one else had a telephone, having the first telephone actually wasn't very useful. But as soon as you add another person with a telephone, you actually get to call that other person and it has some use. But then think about it, as you add even just one more person, that's net more beneficial to both of the people already in that network. And so when you add a bunch more people to a network, It actually gets increasingly more valuable for every single person that joins into that network, which ultimately ends up building this incredible moat around your business, where if you think about it, the reason why it's so hard to build a new social media app that actually breaks out is because everyone's already on Instagram or everyone's already on TikTok, and they're likely not going to leave for your new platform because you don't have the network built yet. And so now that you have a good sense of what strategy you might be able to use in your business.

Now it's time to talk about the number one thing that's actually most important for your business itself, which is making sure that you have a incredible product that people actually want to buy. Now, whenever I hear this term product, I'm kind of scratched my head because it's such a nebulous abstract term like what is a product. But basically, a product is just the core of your business, aka whatever you actually sell. So whether that's the cars or the t-shirts you're producing, the software you're selling, or even the service that you're providing other people, this is the thing. thing that people actually give you money for.

And so what you learn in business school is how to avoid an outcome like a Microsoft Zoom or even a Google Glass versus having an incredibly successful outcome like an Apple iPhone. And there are just two things here that you guys need to take away in order to build your million dollar or billion dollar startup idea. That is number one, to always start with solving someone else's problem. Because if you start problem first, rather than idea first, so for example, you really hone in on helping someone figure out the best way for them specifically to lose weight versus just projecting your idea of what you think is best for them, then you ultimately get to the to the maximal best solution for that particular customer.

And that's of course though, if you do number two, which is to iterate. Now, what I mean by iterate is that if you think about every incredible product out there, they didn't just come out of the womb incredible. You always have to work and improve on something over time, oftentimes years for something to be a world-class product. And so the iteration method you learn in business school is actually to start with a super niche early product, serving a super niche customer, before very slowly over time you actually expand.

And so for example, maybe you have this idea that eventually all commerce is going to move online. And so you ask yourself, how can I actually start really small before going really big? And you realize that, hey, it's really hard to get the book that I want at a physical bookstore. And so what if I actually put a bookstore online for really cheap prices?

And so you launch this first version of your app or your site. And because you're a cunning business person, you start asking all the people who Visit your initial version of the site what they actually like about your site and your service and you hear from them a couple things Which is number one. I love the unlimited selection number two I love how cheap things are and then number three I just love the convenience of how this thing shows up in my door without me having to do anything and so you the smart bald entrepreneur that you are Start to realize oh, I should specifically improve those specific attributes about my online bookstore where I should actually get shipping down to just two days I should keep lowering my prices and I should add more and more selection over time where I'm just gonna start with perfecting an online bookstore but slowly and methodically I'm gonna add tangential products that I know my existing customer base will like like maybe t-shirts one day and then maybe skincare and then maybe dominating the entire world of e-commerce one day and so the main learning I want you to take care in terms of how to build an incredible product that people literally rip off the shelves is by first starting with as really small niche folks and really delighting them and using them as an entry wedge or a landing before you expand really thoughtfully over time but of course you learn that building a great product is never enough and that the most successful businesses avoid the number one mistake most entrepreneurs make pretty early on which is they don't think about marketing. So there's a bunch of boring marketing concepts out there that I'll throw on the screen around here, but there's actually just one thing that I think you need to be really good at marketing. And that is by focusing on this term you learn throughout your time at business school, which is an ICP.

And that just stands for ideal customer profile. But let me break down for you why this really boring buzzword is actually crucial for your success if you actually want to crush it. So let's play out another example where let's say you want to start a weight loss business. Now the typical first time entrepreneur will go out there and be like, I'm just gonna try to help everyone to lose weight because that'd be cool and I can build a really big business as a big market.

But I want you to think about all of the competition out there and how if you're a jack of all trades, then you are a master of none. Whereas instead, if you were to get hyper, hyper intentional and hyper specific about the ideal customer you would like to serve. So for example, you could say, I wanna specifically help moms who have kids who are also trying to balance a job lose weight. Then I want you to think about how much more successful you'll be saying, hey. everyone I love to help you lose weight versus hey if you're a mom who's struggling about being present for your family taking care of that home and also paying the bills and then actually taking care of your body and losing weight I specifically have built a program just for your lifestyle like you can already feel which one you're more likely to purchase if you're that mom and that's compounded even more because you've also through this video learned another concept about marketing that's super important which is channel now what I mean by that is you want to be hyper efficient in your marketing.

Like you don't want to spend money on a big TV ad if you're targeting Gen Z because they don't watch TV, boomers do. But because you know Jane really well, you know all of her habits, you know what she consumes and cares about, you know that she spends a ton of time on Instagram, she follows a ton of mommy bloggers and influencers, and she spends a ton of time in her local community. volunteering at the PTA events. And so you can now take your hyper optimized ad copy that really helps her feel seen and also put it in the specific distribution channel where she's actually hanging out.

And so I'll throw up a bunch of different distribution channels here that you can use for your business. But the main thing to take away here is really understand your customer's marketing message that's going to resonate with them and then meet them where they're at. All right.

How are we feeling? Because we are now halfway there. And because we've learned the fundamentals of building a great business. we now get to instead turn into Wall Street investors.

Also, I'm really excited to teach you guys this because we all know that one douchebag who works in finance and thinks they're hot shit. And I'm basically gonna condense down for you their entire job in just a few minutes so that you know just as much as them. So basically, financial analysis is just this really fancy term for saying, deciding how much a certain business or an asset is actually worth. And you do that by trying to guess how much money or how much cash an asset or a business will generate in the future. And that's how you.

you get to statements like, oh, I think this stock is overvalued or undervalued. And so if you think about it, and you really oversimplify the equation, that really just boils down to caring about three main things, which is number one, how much revenue you're making. So how much money is coming in the door?

Number two, how many costs you have, like what are your expenses? So how much money is leaving the door? And then number three, when you subtract your cost from your revenue, getting to your profit, or the cash that you actually get to keep, and then how much of that you think you'll make over time. And you can find this information for any companies. out there by using something called the three financial statements.

And I figured because I had Starbucks this morning, why not actually pull out Starbucks's financial statements and actually analyze them as a business. So for any mature business out there, you have three different kinds of financial statements. Number one is the income statement.

Number two is the balance sheet. And then number three is the cash flow statement. And just as a quick caveat, there are a ton of nuances I'm going to skip over here because I'm really going to focus on just giving you the foundation that you can start learning from. So your income statement is just that really simple equation I showed you before, which is basically all of your revenues minus your expenses, which then turns into the profit you made during this financial period. So in Starbucks'case, you actually see that they have three different kinds of revenue that they report.

Number one in their biggest bucket, which generated $29 billion in sales, is the company owned Starbucks stores out there. So just your regular run of the mill Starbucks stores that you and I go to all the time. Then they've also actually got a couple of franchise stores where other people actually run those stores for them.

And that's still generating them $4.5 billion in revenue. Now, on top of that, Starbucks also has this line item called other revenue, which is things like their direct-to-consumer and actual coffee brands that you can actually purchase yourself. And so that all sums to a net revenue of almost $36 billion in their fiscal year 2023. Now, you'll see underneath Starbucks'revenue, they start to plot out all their different costs and expenses, but there are a couple main line items when it comes to expenses that I want to teach you guys about. Number one is just your cost of goods sold. So like when Starbucks serves you a cup of coffee, what are the costs that they incur with that cup of coffee?

of coffee, like what was the cost of literally the coffee beans of the person making that coffee of the literal coffee cup itself, because that actually gets you to your gross profit or gross margin of how much money they actually make for every cup of coffee they sell. And that's a different kind of cost than a sales and marketing costs where let's say Starbucks decides to run a huge ad campaign. They have to spend money on that.

And that is a line item within sales and marketing. And that kind of expense is really different from a whole nother kind of expense line item called research. development, where Starbucks is pouring in millions of dollars a year to figure out what is their next pumpkin spice latte. And then lastly, Starbucks also just incurs a ton of costs to run the company itself, right?

Like to pay the corporate employees to figure out how to run this business also costs them salary dollars. And so that's all bucketed within something called general and administrative expenses that pretty much every company out there has. And so that's pretty much the income statement in a nutshell, where that actually sets you up pretty well for the cash flow statement, which is really just a picture of where specifically a company sits. spent and actually made cash from.

And the reason why this is actually different from your income statement, because you think like, oh, like. the money you made and the money you spent is how much cash you have is because in a given year for starbucks for example yes they might make a certain amount of profit but they're also spending cash elsewhere to for example invest in the business where for them they actually spent an additional 2.3 billion dollars in cash to invest in new property plants and equipment so actually in their manufacturing process or to build new stores and you'll also see companies raise more equity or raise debt or pay down debt which leads to different cash flows in their financing activities, which is another bucket of your cash flow statements, which ultimately leads you to see that even though Starbucks generated a profit on their income statement of $4.1 billion, at the end of that financial period, because they had invested in so many new things, they only had a net addition of $730 million in cash for that period. And now that all leads us to the final statement here, which is our balance sheet, which is basically just a picture of what we own and what we owe on a certain day and time. And so for Starbucks, on its balance sheet.

So what it currently owns, it has over $3.5 billion of cash. It has a ton of different stores and manufacturing plants, which are assets that it owns while also having liabilities, AKA things that they owe other people, whether that's paying down debt or paying down a certain vendor for providing them some sort of service. And so you see all of that on the balance sheet here to understand.

okay, what does this business have and what does it owe? And so basically what an investor or financial analyst does is they take these statements and they use these to start projecting out the business through a financial model. And for that, we need to break out our Excel keyboards and pop off our F1 keys. Also, we need to literally bring an entire computer here that actually has Excel on it.

So basically what you guys will see here is I've laid out a pretty simple financial model for Starbucks where you'll see the same line items that we had before, but laid out in a more organized way where you have. your revenue you have your cost to get sold your cogs you break out your gross profit your gross margin and then also all the operating expenses i mentioned before to eventually get you to the net income or the cash flow of this business but what's different about this model here is you'll note that i've put in their historic numbers but then also added projections and so this is where financial analysts will be like oh it's as much an art as it is a science to predict how a company does in the future and so your job as an investor is to really try to figure out and be the best guesser at how much you think this company is going to grow and at what expense rate where for me just for illustrative purposes here i've just assumed a really steady rate of growth But if you think about how the income statement all works together and how you think about the drivers of a business, so what are the levers you can pull to grow a business, you could say instead that maybe in 2024, you actually believe that Starbucks will actually grow even higher in terms of its rate of growth, because you think they're going to run some big sales and marketing campaign or some big brand campaign. And so you will see that trickle down into the revenue, but also you'll need to update here your sales and marketing expense to actually be higher because they're running another campaign. All that to be said, there's a lot of wizardry and a lot of this to figure out how to actually project out the cash flows of business.

Because if you'll remember, in order to ascertain the value of an asset or a company in this case, the present value or the price you'd want to pay today for this asset is really just an estimation of all of its future cash flows discounted back to today. And so stay with me here because I know I just use a lot of random buzzwords and terms. But basically, the reason why I said the term discounted is because if you think about it, Yes, if you were to buy this company today, it would generate some amount of cash in two or three years, but that cash that it generates in the future is actually worth less than that same cash amount today.

And what I mean by that is something that we call the time value of money. Basically, cash today or cash now is worth more than that same amount of cash in the future because you could actually just go invest that cash now, let's say at a 10% interest rate or a 10% return in the stock market, and therefore... the billion dollars of cash that i'm projecting out that starbucks will generate me next year well that's the same thing as having about 900 million dollars today and so in order to calculate the intrinsic value of an asset you basically project out these cash flows and then you discount them back to today by some sort of discount value which is generally the market rate of return let's just assume 10 here and that will give you the theoretical intrinsic value of your asset and this specific methodology of how you value a company is what we call the discounted cash flow analysis. And so generally actual practitioners in finance won't really use DCS as much in terms of actual day-to-day work. And instead they'll use something called a comparables analysis, where here you'll see I've laid out a bunch of other comparable companies to Starbucks.

So McDonald's, Domino's, Chipotle, Yum! Brands that owns KFC and Pizza Hut, and actually laid out their stock price, their earnings, and then a bunch of things called multiples, where basically the intention here is to see where a lot of comparable companies to Starbucks are trading and then using that as a framework to decide on the valuation for Starbucks. Where I can actually take a look at McDonald's metrics and say well McDonald's is trading at a 25 times price to earnings multiple, which basically just means its earnings stands for net income. The total price of McDonald's if you were to directly buy the whole company is 25 times that of how much net income it generated this year. Whereas if I look at Chipotle, which is a much higher growth stock with some more interesting fundamentals, it actually is trading at a much higher price earnings ratio of 60 times because the market seems to like the fundamentals of this business more you could actually use those kind of as guardrails to decide where you should actually put starbucks within that mix like what is their price earnings ratio that makes sense and basically in order to decide what multiple makes sense to apply to any company or starbucks in this case an investor is going to look at all these different qualitative or quantitative measures to your business so for example they'd look at porter's five forces and think about your competitive dynamics and Also, how much are you innovating? Or maybe they'll give you a premium in your multiple because they're a huge fan of the management team or the founder that's running the business.

So say someone, for example, as inspirational as Steve Jobs. And then on the quantitative side, They're going to look at things like what are your unit economics as compared to everyone else? Like, are you running more efficiently than your peer set?

And so basically, an investor is going to take all of these quantitative and qualitative inputs and out decide some sort of multiple for your business, which in this case, Starbucks and McDonald's are actually pretty similarly valued at 25 times price earnings, which makes intuitive sense to me because they're operating at similar market sizes, similar scale and also just similar margin. And so to try to summarize an incredibly complex and nuanced industry like finance in just a couple sentences, these are the key things that matter for you when you think about financial analysis. Number one is that the present value or price that you should theoretically pay today for any asset out there is just the discounted value of all their future cash flows. And you can find a company's historic cash flows through its financial statements, which then you can then combine with all of your different qualitative pieces of research around the company's market size, their company's margin structure, company's competitive differentiation, or the company's competitive landscape and any new entrants coming in to decide how to project out its future cash flows to actually figure out that valuation. Congratulations, if you've made it this far, you're now at the final and actually most valuable part of the video, which is to cover the real secret sauce of the Stanford Business School education and one of the main reasons why they're ranked over all the other business schools.

And Stanford calls this learning the touchy-feely and here we'll call it growing your emotional intelligence. And before you're like, oh John, This sounds super woo-woo, like how is this going to affect my business? I want you to think about if you don't grow in these specific skills I'm about to list, how much money you're going to lose. So the mistake that I used to make back in the day when I was just working in finance and just seeing the numbers was that I didn't think through the fact that all these numbers are on revenue or cost or expenses. What actually makes up those numbers?

And if you think about it, the first principles core driver of how much revenue you make or how much money you're spending, is how effective your people are in your business. So I want you to think about that one bad manager you've had. And then I want you to think about all of the skills that build up into someone who is emotionally intelligent. Self-awareness around recognizing the stresses and frustrations that happen to all of us in our day-to-day jobs.

And then self-regulating those emotions so that you're not taking it out on your people when you're having a bad day, you treat one of your employees poorly. And then beyond that, harnessing empathy, where your manager should ideally... understand the emotions and struggles you're going through so that they can actually do their job properly, which I believe is to help you do your job as successfully as possible.

And then the last piece here that separates a decent manager from an incredible leader is their ability to inspire and motivate you. Because we all had that one coach or manager who pushed us and inspired us to do something that we didn't even think we were capable of. And so when you think about that awful manager that you had, you start to realize, wait a minute, that's why I stopped working as hard for this company. And That's why I actually left this job. And all of the value that you brought to this company, because someone just decided not to care about someone else in terms of their feelings and how they felt, that company literally lost hundreds of thousands of dollars that will trickle down right to its P&L.

And so if there's just one mental model I'll give you on how to be a good manager and a good leader, it is this specific quote, which is, if they win, you win. Basically, when you think about the managers or leaders you've respected the most, there's this general feeling that you realize that they just don't know what to do. genuinely care about you as a human being and your success.

Because a good manager will sit down with their reports and literally ask them, hey, what are you interested in working on? What are you interested in growing in? What gives you passion?

And they'll lay out those goals with you and align those with the organization's goals. And the coolest thing that we actually learned in our studies was that servant leaders and leaders that were conscientious over other people's emotions were significantly more likely to drive more revenue for their businesses. Because if you think about it, if you actually have a manager who puts their team...

team into positions of success where that team actually loves coming into work every day so they're probably working more and they're much more passionate about their job even if it's just like a marginal difference that means your team is more marginally likely to come up with that next 10x or 100x creative idea that is your next billion dollar business. And so the one clear takeaway I've taken into running my own business is that if you serve others, you serve yourself. Now, I wish I could say you just got the full value of a Stanford Business School MBA. But there's actually one thing that I believe is probably the most valuable part of the Stanford Business School education that no matter how hard I try in a video, I can't get to you, which is specifically the relationships you build in your business school class.

Because if there's one thing I've learned having grown up with absolutely no connections, it's that your network is your network. net worth. Because when you think about the alumni database that you get access to as a business school alum, and you realize that unfortunately the way society works is that the more people you know who can connect you with more resources and opportunities, the more likely you are to be successful. It actually gets pretty frustrating for someone who grew up with absolutely no connections. And so the next video I'll work on for you guys is how I was able to build a network having grown up with zero connections.

And so if you don't want to miss that, make sure to subscribe. But I will say in the meantime, that if you just just follow all the skills that you learned in this video and you just iterate and you just persist, you will organically have so much business success over the long term that you will just organically build this kind of network.

Transcript for:Key Strategies from Stanford Business School

Transcript for:
Key Strategies from Stanford Business School