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Stanford Roadside MBA: "Tulare, California"

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The Takeaway: Tulare, CA

A Dairy Finds Its Niche Selling Milk the Old-Fashioned Way

Assess the size of your niche market. California career dairymen Noel and Rolland Rosa are differentiating their product by selling glass-bottled milk processed in their own plant in Tulare, and developing a wholesome, farm-to-table brand. Not every consumer responds to this higher-quality (and higher-priced!) product offering, and so the brothers had to carefully assess whether the market has enough of their potential customers to support the business.

Recognize what keeps the big boys out of your market. Can large milk processors simply add a glass bottling line to their massive plants and begin competing against the Rosa Brothers? Probably not. First, farm-to-table branding requires a close connection between farm and consumer, which a big milk producer would find hard to create. Second, a broken glass bottle means a complete plant shutdown and cleaning to ensure food safety. Such a shutdown would be costly for the Rosa Brothers — but devastating for a larger plant. The big boys stick to plastic as a result.

Understand where you shine.Selling skim or 2% milk requires finding a use for the excess cream. The Rosa Brothers chose ice cream over cheese. While glass-bottled milk was an unoccupied market niche in their area, premium ice cream is crowded with well-established competitors such as Ben & Jerry’s and Häagen-Dazs. Packaging and freshness — key differentiators for the Rosa Brothers in milk — are unlikely to be as meaningful here. Instead, the brothers chose to emphasize their connections to the local community, showing up at ballgames, parks, and farmers’ markets with a truck full of ice cream samples.

Approach from the side when milking a cow. These animals are not house-trained.

— Paul Oyer

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Stanford Roadside MBA: 'Central Valley'

In California's Central Valley, Dairy Farmers are Turning to Nuts

A tight set of economic and political tensions are playing out in the growing fields of California’s Central Valley, and we saw the examples everywhere during our tour.

“Land around here has been selling for $20,000 an acre,” Rolland Rosa told me as we walked his dairy farm outside Tulare. “The almond farmers in the drier part of the valley to the west aren’t getting water this year, so their trees are dying. But they’re sitting on piles of cash from the big run-up in almond prices, and they’re moving this way. Dairies are being converted to almonds right and left.”

On the demand side, consumer tastes have been shifting in the direction of crops that require more water to grow. Heart-healthy almonds are the primary poster-crop for this trend, with prices more than doubling since 2001 as global demand has exploded. In response, California farmers have boosted the Golden State’s total almond acreage by 49%, and the state now produces more than 80% of the world’s almonds, according to USDA statistics. Total acreage of tomatoes, which require about half as much water per acre, has fallen.

Meanwhile on the supply and production side, Mother Nature is pushing in the other direction. The year 2013 was California’s driest on record, and the nearly snowless winter in the Sierra Nevada just made things worse. Earlier this year the Central Valley Project — the federally run aqueduct system that brings water to the area from the mountains — warned it would provide no water to farmers this year. And unlike the tomatoes, asparagus, and spinach they displaced, almonds are a permanent crop that must be watered year round to survive. Farmers cannot simply let land lie fallow if water deliveries are down. The almond trees must be watered, or they will die.

These competing demands put an almond farmer, who has likely invested several million dollars to plant and grow an orchard, in a major bind. The western part of the Central Valley has little groundwater, so the only real source is underground. But as farmers drill — drilling permits in Tulare County more than doubled from 2012 to 2013 — the aquifer is drained, meaning deeper, more expensive wells are required. In some locations, the land itself is sinking, as water is pulled from under it, the San Jose Mercury News reported. A dairy-displacing move to the wetter, eastern side of the valley is the only choice for some.

This tough set of inter-related economic challenges is made more complex because water is one of the few natural resources that we allocate through political, as opposed to market, means. A “price” for water would guide many decisions toward efficiency, but we choose to deal with the meat grinders of Sacramento and Washington, rather than the invisible hand of the market.

— Scott Schaefer

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Stanford Roadside MBA: "Adelanto, California"

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The Takeaway: Adelanto, CA

At Scott Turbon Mixer, The Employees Know the Tricks of the Trade

turbon mixer closeup

Combine product and process innovation.The Turbon Mixer Head — a patented mixing innovation that pushes ingredients down from the top at the same time it pulls up from the bottom — helped Scott Turbon Mixer in Adelanto, Calif., gain an edge on the competition. But since the patent has long since run out, now the firm relies on years of accumulated manufacturing process innovation to keep its costs low and maintain its competitive edge. While rivals can copy the mixer-head design, they can’t easily duplicate the firm’s process innovations.

manufacturing expertise

Institutional knowledge matters. The firm’s manufacturing expertise — the tacit, hard-to-write-down tricks of the mixer-making trade — resides with the employees. To motivate them to gather this knowledge, and to keep employees from leaving once they have it, the firm pays well (relative to the local labor market) and has dozens of long-time employees who have been with the company for a decade or longer. Another way it preserves its institutional knowledge base is by avoiding layoffs — even during the 2008-2009 Great Recession.

turbon mixer bill scott

Create and value custom solutions. Owner Bill Scott stays in regular, personal contact with his customers, so he can work with his design and manufacturing teams to devise custom machines to solve customer-specific problems. The key to pricing these custom solutions is to understand exactly how much value you’re creating for your customer, and then price to split the value and make both sides better off. But to understand the value he’s creating, Bill must know his customers’ business, not just their process.

Welding is harder than economics. At least for Paul Oyer.

— Michael Mazzeo

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Stanford Roadside MBA: 'Route 66'

How Route 66 and the U.S. Interstate System Changed the Landscape of American Business

What do Chuck Berry, the Rolling Stones, and Depeche Mode have in common? Each has recorded a version of “(Get Your Kicks on) Route 66,” the ode to the iconic American highway that ran from Chicago to Los Angeles. Millions of drivers traveled Route 66 from the 1930s through the ’50s as they headed westward and California grew in size and stature. The road became a symbol of the possibilities that western migration promised and of the wanderlust that the ready access to automobiles encouraged.

Along with its significance to popular culture, Route 66 had a huge economic impact on its surroundings. Small communities and businesses popped up along the route to support travelers. Many of them were independent establishments, but the highway eventually helped launch the gasoline, restaurant, and motel chains that we know today.

These chains provided a solution to an economic challenge inherent in providing services to highway travelers: They are rarely repeat customers. Business owners had less incentive to provide quality service to visitors who were only staying a night in their motel or eating a single meal in their restaurant. They could attract travelers with a flashy sign and façade of quality, but often left their customers disappointed. Chains, however, gave customers a consistency across locations and business owners regained the incentive to provide quality, because a guest’s experience in one location directly affected demand elsewhere.

As the importance of Route 66 — and other older highways — diminished in the later 20th century as the U.S. Interstate Highway System was constructed, the new layout of divided roads and interchanges precipitated another business transition. Customer demand became concentrated at interstate exits, a phenomenon my Kellogg colleague Thomas Hubbard (along with Jeffrey Campbell) documents in a working paper: “The Economics of ‘Radiator Springs’: Industry Dynamics, Sunk Costs, and Spatial Demand Shifts.” Fans of Pixar’s movie Cars will recognize the reference to the cartoon community of Radiator Springs that is left to waste when an interstate is built nearby.

In real life, segments of the interstates were constructed at varying distances away from the original highways they replaced. The extent of the economic impact on a business depended on that distance. Gas stations that were several miles away were replaced with new ones, but those that were close to the new freeway merely expanded to accommodate the increase in demand.

The stretch of Route 66 we visited in Ludlow, Calif., was directly adjacent to I-40, and indeed, the Chevron gas station we stopped at had several pumps and an expansive convenience store. Oddly, it also had a sign indicating that photography was prohibited on the premises. I wonder if they saw this roving band of economists coming.

— Michael Mazzeo

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Stanford Roadside MBA: "Yucca, Arizona"

Big Lessons from America’s Small Businesses | Stanford Business                                                                                          

The Takeaway: Yucca, AZ

How Stagecoach Trails Guest Ranch Sells a Cowboy Experience

stagecoach trails guest ranch

Selling an experience is different from selling a product. Because of its unique services and remote location — 20 miles from the interstate along a bumpy dirt road — Stagecoach Trails Guest Ranch in Yucca, Ariz., cannot offer customers any samples prior to purchase. Its product simply has to be experienced to be fully understood. Prospective customers of such “experience goods” seek information from unbiased sources prior to buying, making the management of such information crucial. When the ranch started, owners Carrie and Dan Rynders worked hard to manage the recommendations from tour operators and travel agents; and more recently, TripAdvisor reviews from past guests have become extremely important. Indeed, every guest we talked to mentioned the ranch’s excellent TripAdvisor rating.

stagecoach horseback

Align customer expectations with your offerings. Stagecoach Trails is organized to deliver an exceptional horseback-riding experience, with a stable of 45 well-trained horses and seemingly endless trails on adjacent Bureau of Land Management property. However, a guest who expects spa treatments or room service is likely to be disappointed, and just one unflattering guest review on TripAdvisor can drive away future customers. To prevent this, Carrie Rynders makes sure her website provides ample detail about her ranch’s offerings. Also, the ranch’s “call center” is Carrie’s daughter-in-law, who carefully communicates the guest experience to make sure the ranch experience aligns with the customers’ expectations.

carrie and dan stagecoach

Have an owner on-site. Carrie and Dan oversee a team of “wranglers”: ranch hands who manage the herd of horses and lead guests on morning and afternoon rides. Wranglers are wisely selected for people skills (in addition to equine), and carefully choose the best horse to match a rider’s skill level. The operation is far from set-it-and-forget-it, though. Carrie and Dan are on site 24/7 solving problems, interacting with guests, and making sure things are running smoothly. This level of hands-on attention is hard for a larger competitor — with a hired-hand manager — to match.

To earn a perfect ten, you must stick the landing. Riding a horse for the first time, city-boy Mike Mazzeo quickly gained confidence as he guided “Cherokee” through the desert scrub. But when it came to the dismount, he was no Mary Lou Retton.

— Scott Schaefer

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Stanford Roadside MBA: 'Las Vegas'

The Changing Economics of Las Vegas

When the Roadside RV arrived in Las Vegas, it was the first time I had been there in 25 years. Wow, had the place changed! In 1988, the Strip was glitzy and exciting but it was a distant second to gambling in terms of what made Vegas Vegas. Sure, you could go see Wayne Newton or chow down at a mediocre buffet, but if you were not in town to gamble, you were probably going to get bored quite quickly. Gambling laws had created a barrier to entry for other cities, so Vegas built its competitive advantage around exploiting a near-monopoly in casinos.

Then, Vegas was hit by a wave of imitators and competition. Casinos have proliferated in the United States in recent decades, driven by laws allowing American Indians to open casinos on their reservations, and by revenue-hungry states welcoming them. If you are a gambler, you don’t need Vegas anymore. There are now casinos in 36 states.

To take on this competition, the city of Las Vegas repositioned itself as an entertainment/party destination. First, it tried — unsuccessfully — to become more family-friendly, but then pivoted and began capitalizing on its reputation as “Sin City.” The “What happens in Vegas stays in Vegas” marketing campaign helped sell visitors on this image.

Shows and restaurants at casinos, which had historically been loss leaders for gambling, were upgraded. Now Cirque du Soleil shows demand ticket prices well over $100, as do other respected shows. Long gone is the focus on “lounge lizards.” On the dining front, celebrity chefs have taken over the strip. Dinner at Charlie Palmer’s Aureole in the Mandalay Bay or Wolfgang Puck’s CUT in the Palazzo will set you back $100 (without drinks). Add one of their nicer wines and you’ll need to take out a second mortgage. Hotel rooms, too, are now both expensive and hard to come by.

Legalized gambling has its downsides, so the proliferation of casinos may not be such a good thing on balance. Still, the competition in casinos has been good for most consumers. Vegas now has a much greater variety of things to do. It is not clear, however, whether the casino owners are better off. They have expanded and learned to provide more and better products. But losing their near-monopoly position may have cost them more in profits than the new opportunities have yielded. Competition is good for consumers but losing a barrier to entry is not typically good for a company — or a whole city.

— Paul Oyer

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Stanford Roadside MBA: 'Credits' business lessons from the road

Endbusiness lessons from the road

Big Lessons from America’s Small Businesses | Stanford Business                                                                                          

We hope you enjoyed your visit to some of America's small businesses. Learn more below about the economists and the team that made this journey happen.

roadside mba mike

Mike Mazzeo is an associate professor of management and strategy at the Kellogg School of Management, Northwestern University, and a coauthor of Roadside MBA. His research on product differentiation, quality choice, and market competition has been published in numerous academic journals, and he is on a quest to become the fittest, best dressed, most stylish, and wittiest member of the Roadside MBA team.

roadside mba paul

Paul Oyer is the Fred H. Merrill Professor of Economics at Stanford University Graduate School of Business, the editor-in-chief of the Journal of Labor Economics, coauthor of Roadside MBA, and author of Everything I Ever Needed to Know About Economics I Learned from Online Dating. He is a fan of the Oakland A’s; pampers his flat-coated retriever, Josie; plays a decent game of tennis; and cannot weld worth a damn.

roadside mba scott

Scott Schaefer holds the Kendall D. Garff Chair in Business Administration at the University of Utah’s David Eccles School of Business, where he is an award-winning teacher and former associate dean, and he is coauthor of Roadside MBA and Economics of Strategy. Likes: baseball, bicycles, and road trips. Dislikes: the New York Yankees and livestock of all sorts.


A multimedia project by Stanford Business, based on the book, Roadside MBA, and produced in collaboration with the interactive design firm iFactory. For comments and information, write us at StanfordBusiness@Stanford.edu

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