Utility & Cost Strategy Framework This table directly translates the whiteboard structure, outlining four strategic scenarios based on the manipulation of utility and cost variables. The explanations and examples are drawn from the provided transcript. [[bit(abcd_t)]] | Scenario | Utility (Customer) Uc | Utility (Resource Partner) Ur | Underage Cost Cu | Overage Cost Co | Strategic Goal & Interpretation | | :------: | :-------------------: | :---------------------------: | :--------------: | :-------------: | -------------------------------------- | | 1 | decrease | increase | x | x | from low pr-low cr to high pr-low cr | | 2 | x | x | increase | decrease | from low pr-low cr to low pr-high cr | | 3 | increase | decrease | x | x | from high pr-high cr to high pr-low cr | | 4 | x | x | decrease | increase | from high pr-high cr to low pr-high cr | Table.🗄️(results(📜🪢)) ### 1 Why a **Customer-Focus** venture must grow _PR_ faster than _CR_ Optimality in the upper-left quadrant requires the inequality $\color{violet}{\textstyle PR\;>\;CR.}$ Both ratios change as the firm scales: **PR** rises or falls with stakeholder excitement, whereas **CR** drifts with the economics of stock-outs versus slack. A customer-centric firm earns its edge from _speed-to-demand_; once customers queue up, partners tend to follow. If **CR** (mismatch cost pressure) outruns **PR** (stakeholder eagerness), the firm crosses the 45° frontier into danger territory where over- or under-commitment erodes margins. **Intuition:** - Customer moves first → revenue visibility cushions inventory risk. - Therefore the _acceptance gradient_ must stay steeper than the _mismatch-cost gradient_; i.e., grow **PR** at least as fast as—or preferably faster than—**CR**. ### 2 Why a **Resource-Focus** venture must grow _CR_ faster than _PR_ For capability-first plays the condition flips: $\color{green}{\textstyle PR\;<\;CR.}$ These startups sink capital before demand is proven; their safety margin comes from making shortage losses (Cu)(C_u) loom larger than excess capacity (Co)(C_o). If customer buzz expands **PR** faster than management raises **CR**, the firm slips into the customer zone with heavy fixed assets still on the books—classic over-commitment risk. **Intuition:** - Partner moves first → scale, learning, and cost dominance are the moat. - Maintaining that moat requires the _mismatch-cost gradient_ to outrun any rise in partner or customer enthusiasm. --- ## 3 Execution menu for each canonical move | Move | Primary objective | **Execution path A** | Micro-levers (examples) | **Execution path B** | Micro-levers (examples) | | ----------------------------------- | --------------------------- | -------------------------------------- | --------------------------------------------------------------------- | ----------------------------------- | ------------------------------------------------------------------- | | **⬆️ Move 1**<br>(Low PR ➜ High PR) | **Raise** Probability Ratio | **Increase partner utility $U_{RP}$** | equity sweeteners, early-access IP, volume guarantees | **Decrease customer utility UCU_C** | niche positioning, premium pricing, exclusivity windows | | **➡️ Move 2**<br>(Low CR ➜ High CR) | **Raise** Critical Ratio | **Increase underage cost $C_u$** | service-level penalties, tight delivery SLAs, brand-reputation stakes | **Decrease overage cost $C_o$** | modular tooling, leasing idle capacity, secondary resale markets | | **⬇️ Move 3**<br>(High PR ➜ Low PR) | **Lower** Probability Ratio | **Decrease partner utility URPU_{RP}** | backward integration, stricter quality clauses, reduced revenue share | **Increase customer utility $U_C$** | broadening features, price cuts, wider channel access | | **⬅️ Move 4**<br>(High CR ➜ Low CR) | **Lower** Critical Ratio | **Decrease underage cost $C_u$** | longer lead-time promises, wait-lists, demand shaping | **Increase overage cost $C_o$** | obsolescence risk (fashion cycle), visible carrying-cost accounting | ---- using [gemini](https://gemini.google.com/app/3e09e6e90e15297c) **Three-Paragraph Summary** The research report explores how vertical integration decisions influence a startup's strategic positioning within a 2x2 framework defined by a Probability Ratio (PR) and a Critical Ratio (CR). It analyzes academic literature to understand how different rationales for vertical integration shift a startup's focus between customer utility (UC​), resource partner utility (URP​), understocking costs (Cu​), and overstocking costs (Co​), thereby triggering one of four canonical strategic "moves." Key insights are drawn from studies on product complexity, strategic supplier interactions, and volume uncertainty, each illustrating distinct pathways through which vertical integration impacts the PR and CR axes. Specifically, integrating to manage high product complexity, as suggested by Novak and Eppinger (2001), tends to increase customer utility (UC​), thereby decreasing PR and leading to a Resource-Focus (Move 3). Conversely, strategic outsourcing to a common supplier, even at a premium, as analyzed by Arya et al. (2008), can reduce net utility from that resource partner (URP​), also decreasing PR and resulting in a Resource-Focus (Move 3) by altering competitive dynamics. These decisions highlight how internal capabilities and competitive maneuvers can reshape a startup's stakeholder orientation.   Finally, vertical integration in response to volume uncertainty, based on Transaction Cost Economics, primarily affects the Critical Ratio (CR). If integration successfully reduces stock-out costs (Cu​) more than it increases idle capacity costs (Co​), CR decreases, leading to a Customer-Focus (Move 4). However, if increased asset intensity leads to dominant idle capacity costs (↑Co​), CR increases, shifting towards a Resource-Focus (Move 2). The report also touches upon taper integration as a nuanced strategy for balancing these effects.   **One-Paragraph Summary** The research report examines how startups' vertical integration strategies impact their position within a stakeholder-sequencing framework defined by a Probability Ratio (PR) and a Critical Ratio (CR). Analyzing academic literature, it shows that integrating to manage product complexity (Novak & Eppinger, 2001) or strategically outsourcing to influence supplier behavior (Arya et al., 2008) typically decreases PR by affecting customer utility or resource partner utility, respectively, leading to a Resource-Focus (Move 3). Vertical integration to handle volume uncertainty (Transaction Cost Economics) primarily shifts CR, either decreasing it (Customer-Focus, Move 4) by lowering stock-out costs or increasing it (Resource-Focus, Move 2) if idle capacity costs rise significantly.   **One-Sentence Summary** This report analyzes how startups' vertical integration decisions—driven by product complexity, strategic supplier relations, or volume uncertainty—systematically shift their focus within a Probability Ratio/Critical Ratio framework by altering customer utility, resource partner utility, or operational cost structures.