Summer School 2: Competition and the cheaper sneaker

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0:30Welcome back to Planet Money Summer School, MBA edition. No uncomfortable suits, no boring PowerPoints, just the secrets of business school delivered straight to your brain. I'm Robert Smith, and this is lesson number two, competition and the cheaper sneaker. Every Wednesday till Labor Day, we are meeting here in your ears to learn the way that business masterminds think, just in case you want to be one or outsmart one. Plus, in every episode, we play two great Planet Money stories and talk to a brilliant professor. Last week, we walked you through how small ideas become successful businesses.

1:07But there's often one thing standing in the way of success. The competition. You are not the only one selling a better mousetrap. How do you navigate a world where everyone is trying to be smarter and faster than you? Look, I just teach journalism at Columbia, so I'm going to need someone with a little more of the competitive spirit to help us out with this question. And I found just the person, Dan Wong from Columbia Business School. Hey, Dan. Hi. Great to be here. You are a professor of strategy. I love to say it that way, strategy. That's also how I say it too. As a professional. Yes, absolutely.

1:46You have to say it. It is in the code of conduct. So Dan, we're going to hear two case studies today, and they both deal with this really tough question. How do I compete in a crowded marketplace when I have a lot of competitors trying to do similar things? That's a great question. And this is precisely the kind of question that strategy addresses. And I would say that the answer to that question comes down to one word, and that's differentiation. In a business context, what does that actually mean? How do you make yourself different than another company? Oh, there's so many ways to differentiate.

2:20The two primary ways are based on quality and cost. Quality differentiation refers to creating a product or service that has some unique feature that you can't get anywhere else. It might be because it's more reliable. It might be because it's more convenient. And on price, is that just, I'm the cheapest thing out there, so buy a lot of me? Yeah. The idea is that the creator of a good or service might be able to do so incredibly efficiently. And the result of that is that you can sell that product or service at a low price. All right. So let's keep in mind differentiation as we listen to our two case studies today.

3:01Stories of entrepreneurs desperately trying to seem different while facing fierce competition. First up, how do you dunk on Michael Jordan? At least in the shoe business. Another basketball star is lending his name to a new sneaker. Stefan Marbury unveils his line of high tops at a low cost. His Starberry One basketball shoe will cost$14.98, making them affordable for low-income families and kids. Is it really possible to have high quality at a low cost? The answer after the break. Support comes from our 2025 lead sponsor of Planet Money, Amazon Ads. What do financial customers want more than low fees, promo offers, or premium perks?

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4:25How you HR matters. Learn more at Insperity.com slash Tiger.

4:34Welcome back to Planet Money Summer School. Our first case study aired on Planet Money back in 2017. Host Kenny Malone tells the story of a basketball player, Stefan Marbury and his dream of a cheaper sneaker. Listen for how he differentiates his product. When Stefan was born in 1977, basketball shoes were essentially just a piece of sports equipment, like knee pads for your feet. The most iconic brand for decades was a shoe called the Chuck Taylor All-Star. They were basic, affordable shoes, canvas, rubber, nothing fancy. But when Stefan was eight years old, the sneaker game changed. In 1985, Nike released this commercial.

5:17There's Michael Jordan. He is soaring in slow motion through the air. Who says man was not meant to fly? Air Jordan. It was the first Air Jordan sneaker, and it was beautiful. It looked like a sports car, white and black leather with streaks of red. Stores couldn't keep these things in stock. People were wearing them as shoes, not just as basketball shoes, and they cost a lot. The Air Jordan one retailed for$65. And then the next year, 1986, Air Jordan. The Jordan II came out. It's all in the imagination. Those cost even more,$100. The Jordan IVs cost$110. The Jordan Vs cost$125. Stefan was 13 years old when those Jordan Vs came out.

6:01He was living in Coney Island, Brooklyn, one of seven kids. His family didn't have a lot. And so when Stefan asked his mom for those shoes, she was not having it. I mean, my mother, if I asked my mother for a pair of shoes at that price, the reply was, boy, those are groceries for the month. Why am I going to go spend that type of money for a pair of shoes? And you would say what? Because everybody else got them. Oh, yeah, you're not going to be the one that's going to have a pair. But it wasn't because she didn't want to buy them. It was because she couldn't buy them. Stefan says this planted a seed for him.

6:38He always wondered, couldn't there be another option here? Does a famous player's basketball shoe always have to be so expensive? Now, a lot of kids might think this, but Stefan got to do something about it. Because he grew up, he got very good at basketball, and in 1996, he was drafted into the NBA. With the fourth pick, the Milwaukee Bucks select Stefan Marbury. The camera cuts to the whole Marbury family. They are freaking out. And pandemonium rains backstage. Stephon Marbury is banding by now with Drake Seager. Stephon joined the NBA. He became an NBA All-Star twice. And year after year, famous player after famous player, signed endorsement deals to sell shoes at ridiculously high prices.

7:26Stephon doesn't remember the exact moment, but an idea started to form. And you can think of it this way. A sneaker is made up of foam and rubber and leather. And by attaching a famous basketball player's name, you get to charge more. and kids go crazy for them. But could you use an endorsement to do the exact opposite? To take the same shoe of foam and rubber and leather and attach a famous basketball player's name, but charge less and still have it be cool, still get the kind of buzz the Air Jordan got. In 2005, after he'd been in the NBA for almost a decade, Stephon finally met someone who could help him make this happen.

8:03A guy named Howard Schachter. He's always talked about there has to be a different way. Well, we were the different way. Howard worked for a clothing company called Steve and Barry's, founded by a pair of Long Islanders named Steve and Barry. It was a relatively unknown chain that sold clothes at ridiculously low prices. And they said they were able to do this a couple of ways. For one, they cut out the middleman. They manufactured their own line of clothes in China. They took the smallest markup that they could possibly afford. They basically had no advertising budget. And then they opened stores in struggling malls where they would ask for discounts or free space.

8:43This was the business model. But now, Steve and Barry's wanted to get in to the athletic sneaker market. So word gets to Stefan that Steve and Barry's would like to meet with him. And his first thought, uh, who and who? I didn't know. I mean, I learned of them before the meeting. And I was like, this is, you know, I got to see this for myself. So Stefan took this meeting, and he remembers Stephen Barry's laying out their vision for the sneaker. They're going to call it the Starberry. That's been Stefan's nickname since high school. And they had brought some prototypes, plus some clothes that would be part of the Starberry line.

9:18They start showing me, and you know, this is the stuff that we're making. The quality is really good. And I'm saying, OK, cool. I was like, how much is all of that? How much? It's like$15. I was like, oh, you're going to make all of that stuff for$15? Damn. And then he was like, no, we're going to sell all of this stuff. All this stuff you see is going to be$15 or less. I said, yeah, OK. Like, I... And he was like, no, serious. For real. On August 17th, 2006, the shoe dropped. Another basketball star is lending his name to a new sneaker. Stefan Marbury unveils his line of high tops at a low cost.

9:58His Starbury won basketball. The story was everywhere, and so was Stefan, showing off this new sneaker. People seemed excited to see it, but over and over, the same question kept coming up. One question I might ask is, are you cutting corners at the production end? Because that's a sensitive issue. Not at all. Everybody thought, if this costs$15, it cannot possibly be a good basketball sneaker. On Good Morning America, Diane Sawyer was worried about the bottom of the shoe. I was asking, is this enough traction to play basketball in here? What the Starberry had was a price signaling problem. In the marketing and retail world, prices communicate so much information, especially in an aspirational market like athletics.

10:43So when you go out and you buy a new golf club for a little bit more money, you're hoping that that is going to buy you performance. Like maybe your drive will be 10 yards longer or something. And so pricing the Starberry at$14.98 had unintentionally signaled that this sneaker is crap. The fancy shoes are 10 times more money. Does that mean that they are 10 times better? Does that mean that the Starberry is 10 times worse? And what Stefan kept saying was, if people would just try these things out, they would see that these are not 10 times worse. Before we talked, I went on eBay. So these shoes are 10 years old.

11:22They're my size. I'm going to put these through the ringer, man. I'm going to play games on it. I might try to run a half marathon even though I haven't trained. My prediction is that they're going to hold up. You're going to run a half marathon? I'm going to try. You're good. Okay. You're good, baby. Go for it. Go for it. One mile. Two miles. Three miles. Shoes kind of heavy. Don't breathe well. But not the problem. I am the problem. Okay, six miles. 6.55. Oh, God. All right, fine, whatever. I did a half of a half marathon. Terrible idea. Shoes held up fine. But Howard Schachter from Stephen Barry's says that both he and Stefan knew there was really only one test that ultimately mattered.

12:06Can an NBA player wear these$15 shoes in a real NBA game? It's very easy to rip a$15 anything. Yeah. But if an NBA player can entrust their body to these, it's got to be good enough. It's got to be good enough. And then on November 1st, 2006, the day arrived. The first game of the season, New York Knicks versus the Memphis Grizzlies. There's Stephon wearing the black version of the Starberry, the version he wore for away games. Howard Schachter remembers watching this. Enormous pride every time they showed him and you saw that logo. saying, wow, we actually, this little company nobody ever heard of, we made it.

12:51We got this NBA star is wearing the sneaker we thought about on court. The game was going great. It was the third quarter. Stephon and the Knicks were leading by nine points. And then all of a sudden, I think Steph tripped or something. Oh, Stephon has turned his ankle. He's asking to come out of the game. I'm thinking it better not have been the **** shoe. Remember, he's playing in those reduced priced shoes. The wind is knocked out of me like, God forbid, the shoe ripped on court or it didn't hold the traction and he slipped and tore his knee or something. You know, it's done. Stefan goes over to the bench.

13:33The game goes on without him and somebody rushes over to look at his foot. And everyone is like, oh, my God, let's hope it wasn't the shoe's fault. Like, do you know what I'm talking about? Probably. Stephon was totally fine. He'd gotten kicked in the shin or something. Came back into the game, and honestly, he doesn't even remember it. You know, it's part of basketball. For the entire season, Stephon Marbury wore a$15 sneaker. Sales of the Starberry took off. Stephen Barry's expanded the line beyond just the basketball sneaker. And in total, over the next year and a half, they sold around 4 million pairs of Starberry sneakers.

14:13And Stefan, for his part, he earned around$8 million in royalties off of clothes and shoes. The experiment was a success. It had worked.

14:29That dream, it did not last forever. Because in 2008, the financial crisis hit. Howard Schachter says it hit Stephen Barry's particularly hard. Retailers that work on thin margin rely heavily on the credit markets to give them a line of credit in which to go out and buy inventory. But credit lines froze up, and Stephen Barry's filed for bankruptcy. Without the store, the$15 sneaker experiment was done. Other things were also going badly for Stefan at this moment. His father had died tragically. His basketball team was struggling, and he was getting blamed for it. Plus, he wasn't young anymore.

15:12And so in 2009, he decided it was time to move on. Stefan left the NBA, and he left the Starberry sneaker experiment behind.

15:26That was Planet Money's Kenny Malone in 2017. There is a coda to this story. Stefan Marbury had a second career playing in China, where he became a huge star again. and he even brought back the shoe for a while. But the idea of a brand name sneaker at a generic price did not catch on. These days, if you want a Starbury, you'll need to buy them used. After the break, we will bring back our professor and talk about what we MBA students can learn from a$15 shoe.

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16:45It packs 25 grams of protein, 6 grams of fiber, greens, and more. High-quality ingredients with no fillers or nonsense. Try the newest flavor, limited-edition chocolate mint. Go to Kachava.com and use code NPR for 15 % off. That's cachava, K-A-C-H-A-V-A dot com, code NPR. All right. All right, everybody. Settle down. Take your seats. Class is back in session. And Professor Dan Wong has been taking notes. Dan, Stefan, he took your advice. He tried to create something different, and he sold a decent amount of sneakers, but it never became an Air jorded. It never really took off. And no one else has tried to do the same thing since.

17:32So what is the challenge here? You know, when it comes to differentiation, a lot of it has to do with making sure that all of your choices that you're making are aligned to the essential feature that's going to make you distinct. And what I would say happened with the Starburys was really a problem that I like to think of as being stuck in the middle. Stuck in the middle. Okay. So what is the middle space mean in business? Well, simply put, that means that a product or service is trying to be everything to everybody. And that's really hard to pull off. I don't know, Dan, it seems like maybe that would be great to have a product that is everything to everyone, that is both the most awesome thing in the world and also the cheapest.

18:15Like, that's a good product, it seems, but maybe a bad strategy. I think it's a bad strategy because you're not optimizing for any one distinct thing. and there are going to be competitors out there that do optimize that for that one thing. And so Starberries are trying to have great brand power and at the same time they're trying to be incredibly affordable. But they're not going to be as affordable as the most affordable sneaker on the market and they're not going to have the same level of brand power as let's say Jordans which are obviously at the top of that status hierarchy. The people who buy Jordans really care that they're incredibly highly priced And the reason why is because that price contains information.

18:56People want others to know that they have spent their earnings on these Jordans. And because they have these Jordans, they occupy high status. That's a really important way in which Jordans differentiate themselves from other competitors on the market. So if you're stuck in the middle lane, you basically open up all these other lanes for your competitors to be like, hey, you know, we can do a shoe for$8. Absolutely. If I'm a generic sneaker maker looking at this situation, I'm probably not as threatened by Starberries as you might think. And the reason why is because I know that the people who buy my shoe are those who are looking for affordability.

19:34And although Starberries are more affordable than, let's say, Jordans or other brand name shoes on the market, they're not going to be affordable as my generic sneaker, which I'm producing with the lowest cost possible so that I can sell them for the lowest price possible. Okay, so that is differentiation on quality and price. But what if two products are almost identical? Think Coke and Pepsi or Uber and Lyft. Or, as you'll hear in our next case study, hand bells. You know, the kind you hear in Christmas pageants. This is one of our favorite episodes about how a seemingly peaceful product can spark a brutal competitive war.

20:18It was hosted by David Kestenbaum in 2013.

20:24When you've got two companies down the road from each other making the same thing, you can almost guess the history. Originally, there was just one company. Something happened. Maybe someone got angry, somebody left, and they started a second business, a competitor. In this case, that someone was a man named Jake Malta. In the 1960s, he worked at what was the only bell shop in town, a place called Schulmerich. And Jake was Schulmerich's chief engineer. This is Jake's daughter, Joanne Malta. His library was full of books on music, and nothing was not read. He designed Schulmerich's first handbells.

21:00But then there was a change in management. Jake Malta didn't get along with the new bosses, so he left. And he could not stop thinking about bells. He thought he had a way to make an even better handbell, a bell of supreme perfection that he hadn't quite achieved at Schulmerich. I've got to explain a little bit about bells here. A bell, when you ring it, it vibrates and produces this one central note. But you also get these other notes in there. Overtones, they're called. And Jake Malta wanted to try to get rid of as many overtones as he could. He wanted to make a bell with a very pure sound. Because he knew that he could make it better.

21:35And, you know, we still believe that he achieved that. Jake Malta's new bell had a slightly different shape. and this part is key, so remember it. He removed the little brass nub at the top of the bell where it attaches to the handle, something called the tang. The result, he felt, was a bell that produced an uncommonly pure, clean sound. Malta took his design and he started a new handbell company, not far from his former employer, and he gave it a name like his own. Not Malta, but Mallmark. So now you had two bell companies, the old one, Schulmerich, selling bells with tangs, and Mallmark, Jake's upstart, selling bells with the tang cut off.

22:17And before we get to the decades-long war, I'm just going to play you what they were fighting over. This is a Shulmerk bell, the one with the tang.

22:33And this is a Mallmark bell, Jake's new bell, with the tang cut off.

22:45I have driven myself crazy trying to compare these two bells. Sometimes I hear a difference, but frankly I think it might just be that I was holding the microphone in a different spot. Here I'll play them again. Schumwerk bell with tang.

23:04Mallmark bell, no tang.