"Sales is down this month too" Krish*(aka Brainy in part-1) thought to himself as he was going through the sales report that the Baker sends him once at the end of every month. He had before him the past reports and he could clearly see a pattern of declining sales month on month. "What could be the reason?" he pondered as his mind immediately thought about the illness previously suffered by the Baker. Is the Baker suffering from the illness again? Could it be the reason for the drop in sales? He decided to pay a visit to the baker and find out the reason. "Hello, partner" the Baker greeted rather cheerfully, implying that Krish had almost bought the entire tokens from the market in the "fear-sale" when he had fallen sick and was now a part owner in the business. "Hi, hello" Krish acknowledged back with a smile. "Did you see the sales report I had prepared." "Yes" replied Krish, " and that's the reason I'm here to talk with you." "Oh!" replied the Baker as he poured a hot cup of tea and offered it to Krish. "Sales have been dropping every month, did you notice?" posed Krish sipping his tea. "Is that so?" "Yes," replied Krish and showed him the comparative figures with the help of a chart that he had prepared. "Oh, yes. I see" replied the baker somewhat surprised, "it's dropping alright". "Yes, and I was wondering, why? and thought that you had fallen sick again" "No, No" replied the baker cutting him in mid-sentence, "I am fine. And I know the reason for the fall in sales. Come by the bakery tomorrow and see for yourself". The next day Krish got up early and got ready as he was very curious to find out as to what could be the reason for the drop in sales. As he reached, he saw to his astonishment that a competitor had sprung up right next to their shop. The Baker waved at Krish from behind the window of their bakery and gestured by pointing his finger at their competitor. Krish looked in the direction that he was pointing at and nodded his head. "Now I know," thought Krish and he stood there observing customers walk into either of the two bakeries choosing at random to buy their bread and cakes from.
"Is he any good? Is his service any good" posed Krish, as his partner was kneading dough for a fresh batch of bread. "Yes, he is" replied the baker, "and a good man too." Krish was silent as now he realised that it would be only a matter of time before their sales drop to half of their pre-competition level. What to do now? How to bring back sales? How to attract customers? Thinking about all this as he was walking he found himself that he had wandered and serendipitously reached the library. "Wow!" he wondered aloud, "there got to be book's here that should help me to solve my issues" He walked in and inquired where the business section was and the librarian was slightly amused at his choice for wanting to read books above his level and with a smile said "Third row on the far left" and pointed in that direction. Krish thanked him and before long was immersed in a couple of books on marketing, sales and business in general. Others who frequented the library stopped for a moment and smiled at this spectacle of a kid almost half visible behind a stack of books. But he was so engrossed in reading that he hardly noticed anything happening around him when he realised that an elderly gentleman was standing next to him, and as he looked up the old man spoke, "May I sit beside you?" Krish nodded and tried to get back to reading when he was again interrupted, "May I know what is that you are reading and why?" he asked in a tone that sounded like he wanted to genuinely help Krish with his issues. Krish blurted out the reason why he was reading all these books, as the older gentleman listened nodding his head, and as he finished his tale, "Could you please go and ask the librarian to fetch you a book on medieval castles and forts" the old man requested. Krish was initially shocked, and wondered, "How could such a book be of any help?". But he obliged with the request and went in search of the librarian.
He came back with a thick book on his hand and placed it on the table before them. The old man flipped a few pages and pointed to a full page beautiful picture of a castle surrounded by what seemed like a lake. "Do you know why there is all this water surrounding this castle?" "Maybe to enhance the beauty of the castle" replied Krish, as the old man continued, "And do you know what it is called?" "No" replied he shaking his head, "This is a moat" Krish had never heard of such a thing, "A moat is there to protect the castle from invading armies as it would make it difficult to attack" and went on to explain in detail all about its uses and functionality. Krish was quite interested and soaked up all the information in and as he was digesting it all, he wondered, "But sir, how is this all connected to my problem at hand?" he posed rather confused. "Ah! right. you have come straight to the point. Any business is like a castle and you need to have a moat surrounding it to protect you from any competition that will attack you and take away your customers and as a result your profits too." A light flashed in his little brain which manifested as a smile on his face. Krish now understood the connection of seeing the business as a castle that needs to be protected. "The primary criterion of a great business is that it has a moat which is impossible to cross, may be filled with crocodiles and sharks and an owner like you who makes sure that the moat is widened and maintained every day." "Time to wind up, Mr.Buffett" they were interrupted by the librarian, "maybe you can continue to educate your protege tomorrow." Krish didn't quite catch the name of the old man though, as he complimented him, "Yes, a fascinating young man" replied the old man and got up to leave. "Thank you, Sir" replied Krish and left the building with a spring in his step.
{exercise for kids: how will you defend the bakery, from attack?}
As he was walking down the road thinking about "moats" and how they protect the castle from invaders, "How could a business do something similar?" But what is a moat for a business? How to establish one? What kind of a moat will prevent his competitor from stealing away his customers? Just as he was thinking about all this he saw a villager walking with a loaf of bread wrapped in a sheet of paper. Krish wondered whether he bought it from his shop or from his competitor. He could not tell, that's when it struck him, "Maybe I should make it clearly visible for everyone to know where they bought their bread from" And as everyone visually can see that more people bought their bread from his bakery then they would more likely buy from him in the future. Branding. He rushed home, took out from his cupboard a set of crayons and started doodling on a clean sheet of paper and pretty soon he had a design that he liked, "This is my brand and a logo to go with it" he proudly showed it to the empty room. He had sketched a beautiful "HB" with artistic beauty the initials of the name of his "Honest Bakery". "Now from hereafter all my packaging, store and signboard will sport my unique logo and people will know". And he relayed his idea to his partner, who agreed with enthusiasm to his scheme, and soon enough every little bit that they could put their hands on bore their logo, including the apron that the baker wore gleamed with the bright initials "HB". Customers loved the change. Now people walked out with takeaway bags sporting their brand logo. Now they were visible everywhere. A few villagers even commented, "Smart fellow he knows a thing or two about business". Krish was pleased and beamed with pride. And soon the sales charts started to rise again. But his joy was short-lived, as news reached his ear that his competitor had also started to brand himself, "He should call himself, 'Copycat Bakery' for stealing my idea" he lamented with a bit of frustration. But his competitor did not exactly copy him but did it with a twist. He had introduced a new delicacy which he called 'cupcakes' and branded his store as "The Cupcake Factory".
And it was an instant hit with the villagers as he could see a lot of customers with takeaway bags sporting his competitor's logo. "They are delicious and yummy", he overheard a kid say to his mom. "I'd like to eat a different flavour for each day of the week," said another. Krish could see his moat vanish into thin air. What he thought of as an impregnable moat, his branding idea has now proved to be no moat at all. With customers making a beeline for his competitor's place, Krish and his partner had no choice but to introduce cupcakes too. Now he was the 'Copycat'. What a shame. "But not to worry," said his partner, the baker, " I have an idea that's been cooking up in my mind for some time. I think it is time to give it a shot". And presented a try full of round brown baked dough with bits of cholate chips on them. "What's this?" asked Krish. " I will call them 'Cookies' and we can have different types just like the cupcakes," he said as he urged Krish to take a bite. And it was heavenly. Right then he knew that they had a winner. And soon they had a new branding opportunity, "Cookie Delight" And people loved it as much as they loved their cupcakes. And their chocolate-chip cookies was a hot favourite. Now they were the original and their competitor had to copy their idea of cookies, for him not to lose his regulars. It's was an arms race, sometimes they were ahead and at other times their competitor was ahead. "Boy, to maintain a moat is tough," he thought to himself, as he was pouring over the sales charts and noticed something that he had not noticed before, "Sales volume was up but his profits were down". "Why?" he wondered. And digging deep into the expenses with greater scrutiny which revealed that all this branding raised their cost but they had not raised the price of goods inline with the rising cost of branding. "Hmm," he thought to himself, "What is the use then of all this? Both the bakeries have been running hard just to stay in the same place. All their efforts were not filling their coffers. But at the same time if you failed to do it then you would be dead and out of business in no time. [And not to mention, they started to offer discounts on purchases just to keep their regulars happy.]
He conveyed all this information to his partner, who said that he has an idea to raise the price of bread and cookies. On hearing this Krish jumped with delight. "What is it? How can we achieve it?" he was rather impatient. "Fresh @6" he showed a hastily scribbled out piece of paper. "I am going to bake two batches every day, 6 in the morning and again at 6 in the evening, so that my customers will know that they can get fresh goods at this time, and they will not mind paying a percentage more for the freshness". Krish was a bit skeptical, but he trusted the judgement of the baker, as he continued, "And I am going to reduce the size of each batch so that there will always be a demand as people who don't show up at the appointed time have to come back in the evening". "But", objected Krish, "what if they go to the adjacent store for their purchases? then, won't we lose our regulars?". "Yes," continued the baker, "but if he also does not play by our rules and bakes a single large batch as is the custom till date, then customers will know that if they can buy bread at any time of the day, then they are not getting freshly baked goods, and moreover people will prefer us for our fresh produce even though they know that they can get it from our competitor at any time of the day". "Which means then he has no choice than to play by our game and copy our model and then we both come out the better in spite of our stiff competition". They both smiled at this idea, as they have found a way to cooperate and also compete at the same time. {Six months later} One fine day Krish heard his mom say, that a stranger has come calling on him, "Who is it mom?" he asked as he approached the door, "Hi!" said the stranger and introduced himself, "I'm Mr.Tokenwala, and I'm here to buy your bakery tokens". Krish was surprised and probed for more answers. The stranger replied that the bakery business is the hot industry to be right now, as it is better performing with sales of goods shooting up, with all this cupcakes and cookies catching the likes of the public, and people are bidding up the price of bakery tokens as there is no price high enough for such a booming industry. Krish absorbed all this information and promised the stranger to have a reply by tomorrow as he needed time to think it over.
Krish later did some calculations and found out that for the price Mr.Tokenwala was willing to buy the bakery tokens, the sales and the profit from the business have to be multifold than what it is at present. Can the bakery achieve such large sales volume? Even if you assume that the competitor closes his shop, there is no way for his store to do such high volumes as there are only so many people in the village and even if they eat cookies & cupcakes all day, seven days of the week and not eat anything else, even then they could not achieve such high sales volumes. "Then why is there such a high price to buy the tokens?" Krish wondered as he could not figure it out. Krish was confused, should he sell at this price? Or, is there something that he does not know that the stranger knows? He re-checked his calculation again and it held good, except that there was a minor correction, not only the kids and adults but also the newborn babies, with no teeth yet, have to eat the cookies and cupcakes, and make up the high sales volume needed to justify the price. "This is crazy". But still there was doubt lingering in his mind, so he went in search of the wise old man he met at the library. "Excuse me, sir," Krish paused for the librarian to look at him, "do you remember the last time when I was here," "Yes" interrupted the librarian even before he could complete the question, "I expected you to visit us much sooner" he paused and pointed towards an aisle, "Mr.Buffett is right over there". Krish looked in that direction and saw the same old gentlemen sitting and reading, "Thank you". "You are welcome". "So, his name is Buffett". Krish made a mental note, and as he neared him made his presence known by means of a gentle cough, "Good morning Sir. Sorry to disturb you". "Not at all," replied Mr.Buffett, "It's a pleasure to meet you again. And I assume that everything is going on well at your end and I am a fan of your cookies and cupcakes", Krish smiled as he continued, "I have been noticing your efforts and your experimentation with 'moats' in your bakery business". "Thank you, Sir". "So, now what is that you are here for?"
Krish updated him on the offer by the stranger to buy his bakery tokens at a price that does not make any sense to him. "Ah!, so you have been approached by Mr.Tokenwala" "Yes, Sir". "I know him very well," said Mr.Buffett, "he is a good fellow, but his mood sways and he has incurable emotional problems".
Krish looked confused. "He laughs when others laugh and cry when others cry" he explained as he continued, "and depending on his mood he will quote his price to buy or sell. Was he happy or sad?". "Very happy. Indeed I would say euphoric" replied Krish. "Then did he offer to buy your tokens at a high price?". Krish nodded, "Then why not benefit from his generosity? Be fearful when others are greedy and greedy when others are fearful�. Krish smiled as he now understood Mr.Tokenwala and also about his mood swings. He already knew that markets can go crazy on a 'fear-sale', that had let him buy the bakery business in the first place, but he now understood that it can also go crazy on 'euphoric-highs'. "Deal," said Krish as he shook hands with Mr.Tokenwala, concluding their business, and as he was about to leave, "Sir, if I may ask you, is there any business tokens that you are interested to sell?". "Thank goodness, you asked," he replied, "I am desperate to sell the tokens of the company 'AxE', as they are facing a huge problem and I am willing to sell it at any price". "Just make me an offer". Krish smiled as he had heard this pitch before.