Prep

The Hubbard Rule: A competitive advantage is NOT just having a scarce asset (like the Safari default or a prime Starbucks location). To qualify as a CA, a firm must be able to use that asset to create more value than its competitors can and capture a meaningful portion of that value as profit.
How I'll Apply It: For any question about CA, I will immediately break it down into two parts:

Value Creation: Does the firm have underlying resources (e.g., better algorithms for Google, better procurement for Trader Joe's) that allow it to generate more value from the asset than anyone else?
Value Capture: Is the firm able to retain a share of this "surplus value," or is it forced to pay it all away to a supplier (like Apple)? If it pays it all away, it's not a CA.

The Hubbard Rule: The central question is always, "Why not use a contract?" The primary reason to vertically integrate is to solve the "hold-up problem" that arises from relationship-specific investments.
How I'll Apply It: When a question involves a "make vs. buy" decision, I will analyze the degree of asset specificity.

High Specificity (like the proposed on-campus Evanston hotel): An independent partner would be "locked in" and vulnerable to renegotiation by Kellogg. Foreseeing this, they might not make the investment in the first place. This favors vertical integration (Kellogg building it itself).
Low Specificity (like the Miami Hyatt): The hotel has many other customers, and Kellogg has many other hotel options. The "hold-up" risk is low, so a contract works well. The Disney case also shows how owning an asset (IP) allows you to maximize value across a system (movies + theme parks).

The Hubbard Rule (Structure): Industry consolidation (fewer, larger firms) is driven by scale economies based on large fixed costs. If a new technology or way of competing is a variable cost (like Marriott's in-room amenities), it does not create a scale advantage and will not lead to consolidation.
How I'll Apply It: For questions about changing industry structure, I will identify whether the key cost is fixed or variable. This was the key to the AI/Travel Agency question. If an AI system is a large fixed cost (flat fee), it will cause consolidation. If it's a variable cost (pay-per-use), it won't.
The Hubbard Rule (5 Forces): Industry profitability is determined by the combination of the five forces. The "one bad force principle" from the example final means that even if one force is weak (e.g., low rivalry due to switching costs), the industry can still be unprofitable if another force is strong (e.g., low barriers to entry or powerful buyers).
How I'll Apply It: If a question suggests a single factor (like switching costs) will make an industry profitable, I will argue that this is "uncertain" because we must consider the other forces, any one of which could destroy profitability.

The Hubbard Rule: A competitive advantage is NOT just having a scarce asset (like the Safari default or a prime Starbucks location). To qualify as a CA, a firm must be able to use that asset to create more value than its competitors can and capture a meaningful portion of that value as profit.
How I'll Apply It: For any question about CA, I will immediately break it down into two parts:

Value Creation: Does the firm have underlying resources (e.g., better algorithms for Google, better procurement for Trader Joe's) that allow it to generate more value from the asset than anyone else?
Value Capture: Is the firm able to retain a share of this "surplus value," or is it forced to pay it all away to a supplier (like Apple)? If it pays it all away, it's not a CA.

The Hubbard Rule: The central question is always, "Why not use a contract?" The primary reason to vertically integrate is to solve the "hold-up problem" that arises from relationship-specific investments.
How I'll Apply It: When a question involves a "make vs. buy" decision, I will analyze the degree of asset specificity.

High Specificity (like the proposed on-campus Evanston hotel): An independent partner would be "locked in" and vulnerable to renegotiation by Kellogg. Foreseeing this, they might not make the investment in the first place. This favors vertical integration (Kellogg building it itself).
Low Specificity (like the Miami Hyatt): The hotel has many other customers, and Kellogg has many other hotel options. The "hold-up" risk is low, so a contract works well. The Disney case also shows how owning an asset (IP) allows you to maximize value across a system (movies + theme parks).

The Hubbard Rule (Structure): Industry consolidation (fewer, larger firms) is driven by scale economies based on large fixed costs. If a new technology or way of competing is a variable cost (like Marriott's in-room amenities), it does not create a scale advantage and will not lead to consolidation.
How I'll Apply It: For questions about changing industry structure, I will identify whether the key cost is fixed or variable. This was the key to the AI/Travel Agency question. If an AI system is a large fixed cost (flat fee), it will cause consolidation. If it's a variable cost (pay-per-use), it won't.
The Hubbard Rule (5 Forces): Industry profitability is determined by the combination of the five forces. The "one bad force principle" from the example final means that even if one force is weak (e.g., low rivalry due to switching costs), the industry can still be unprofitable if another force is strong (e.g., low barriers to entry or powerful buyers).
How I'll Apply It: If a question suggests a single factor (like switching costs) will make an industry profitable, I will argue that this is "uncertain" because we must consider the other forces, any one of which could destroy profitability.