BUSI 103 - Introduction to Business (Chapter 2)
July 28, 2026
Before you decide what to charge, what to build, or who to hire, you have to answer a prior question: whose problem are you solving, and compared to what they would otherwise do?
Read time ~37 min - ~5,600 words - problems ~50 min
Why this matters. Every technical skill in this course is a tool for a job, and this chapter is the job. Things change a lot - market conditions adapt, customers change their tastes, competitors change - so you need a true north that you go back to. Value creation is it.
What you’ll be able to do.
The big ideas.
Key terms. value creation, customer surplus, value proposition, willingness to pay, technology, capabilities, business model, network effects, status quo, learning curve, zero-sum
Suppose a liberal arts college decides to build a business program where none existed.
What binds? The interesting thing is that the recipe here is probably well known. You can observe it from a lot of other schools, and there is a lot of commonality in what they do. You need resources, faculty, and courses. The playbook is relatively well understood and discoverable.
Demand is not the problem either. It turns out there are a lot of students who want to do this - business is one of the leading majors worldwide as far as what students want to study.
So the thing that is probably going to bind is something else: is a liberal arts school even the best place to do it? At big schools, R1 schools, state schools, there is this educational product, the MBA, which aggregates all of this faculty and talent - because to create a good program you need critical mass, and talent wants to work together and do research together. A lot of undergraduate business education is a model of drafting off the excess capacity of those very large MBA programs. A liberal arts college does not have those resources lying around, so it has to build from scratch while competing against schools that can amortize their faculty over a much bigger base.
Hold that. We will come back to it once you have the four ingredients and the competition lens to work it with.
Value is not a property of the product - it is what happens when a particular person, in a particular situation, gets a problem solved better than the next best thing they could have done.
Start with a comparison instead of a definition. The campus dining hall versus grocery shopping: the food is already made, it is already there, and your friends are there, versus going to the grocery store all by yourself, having to do the work, make the decisions, bring things in, and then you still have to cook it. The dining hall gives you convenience if you are time-starved, and there is a social aspect to it, but maybe you do not have choice, or you do not have the quality that you want.
Notice that the dining hall is not a better product than a grocery store. It solves a different problem for a person in a different situation.
Run the same move on Airbnb versus a hotel. The nice thing about an Airbnb is that it can be quaint, someone’s house, a little more homely and not so sterile. At the same time there is a little bit of a risk with this adventure. Am I going to like this place? Is the host going to be good? Is something bad going to happen with the place, or with the neighborhood? Sometimes we are up for that, and that is part of what makes a vacation kind of fun, but sometimes we just want to get things done. If you have a business meeting the next day and you need a good sleep and a reliable bed downtown, you probably pick the hotel - a brand where you know the quality is there, and if something is wrong, someone is on staff to move you to another room.
One more, because it adds something the first two do not. Google Docs versus Word. You can compare them at the feature level, and Word has more things you can do if you want something complex - but that is probably not really what we are thinking about anyway. When we are making documents we are usually collaborating, so the real question is which one is easier to share, and that depends on what other people are using. When everybody knows how to use Google Docs, it is nice to also use Google Docs, because it is easier for them - and when it is easy for them, it is easier for them to team up with you.
That is a network effect: some things get more value the more people use them. The value of an iPhone increases as more people use it, partly because interacting with other iPhone users is smoother, and partly for less obvious reasons - it is easy to find somebody who can repair one.
One thing to keep straight from the start: you need to create value over the next best alternative, or people would opt for someone else. It is not enough to create value over the option of non-consumption. Context matters, and it could be that you do nothing different but the emergence of a new thing changes your value proposition anyway.
Bottom line: Do not ask whether the product is good. Ask whose problem it solves, in what situation, and compared to what.
A business is sustainable only when the customer and the business are both better off, at the same time.
Strategy sounds intimidating - people associate it with long meetings, top-floor executives, and complicated diagrams. When you think about the basics of strategy, though, it is very simple. Strategy is a plan to create value. You identify an unmet need, which is the opportunity with a customer, and you organize resources to deliver on that.
For a business to be sustainable you have to do two things at the same time.
First, customer surplus. The value delivered to the customer must be significantly greater than the price they pay. That makes them happy, creates satisfaction and loyalty, and gives them a reason to act.
Second, the business has to be profitable. What comes in from customers has to cover all the costs, then allow for sustainability and reinvestment, and then some for profit. A business has to be profitable to survive.
This applies in both directions - to customers, who are who we are doing it for, and to the people who provide the inputs: suppliers, people who we buy from, and our employees, because in a real sense we are buying their labor from them. Everybody interacting with us, in service of the mission we look to deliver, has to be winning something. Otherwise, if they thought they could be doing something better than what they are doing now, they would do it, and then a piece in our value chain gets broken.
So value creation is not just about making profits for yourself. To make this work you have to design a system that works, delights your customer, creates a surplus, and makes them want to do business with you - and the same applies to every supplier and every employee.
Bottom line: If any party in your chain is not winning something, that link comes apart eventually, and it will not wait for you to be ready.
Value gets built out of four things, and knowing which one is scarce tells you where the real work is.
Opportunity. There needs to be the recognition that you can see an unmet need, or that there is some problem your business can solve. It is the problem that exists that is worth solving. Not people in the abstract, but people with a problem, identifiable enough that you can find them and talk to them.
Resources and assets. You often need inputs - talent, material, capital, money, stuff - and all of it needs to be identified and then organized and marshaled together. You cannot just manifest this from nothing.
Capabilities. You need the expertise and knowledge, the know-how of how to coordinate and orchestrate these resources into something valuable, efficiently. Even when we know the problem we want to solve, we know all the ingredients, and we have a set of technologies in front of us that we could all pick from, what differentiates who is going to win at the end of the day is who has the better capabilities: who can take all of this and execute it better, have people who are going to work smarter, faster, harder, better, learn more, and make the system better. That is what I mean when we talk about capabilities.
Technology. Some people think about technology as being like some gadget or something, and a technology can take the form of that - that is when we take things that we know and ways to do it and create a process and physical things and bake it into one clear package. But technology is more like, I think, not a finished dish. In the cooking analogy it is like a recipe. It is a code, it is an approach, it is a set of how to combine certain resources we know to produce an outcome.
That reframing matters because it makes technology a choice. A production facility chooses a technology - some combination of machines that cost an amount, plus labor, to produce an outcome. You might produce the same outcome with a different set of machines that are considerably more expensive and require less labor, or you might source the main material from somebody else, which lets you use different machines and talent. There are many ways to achieve the same end, and technology is the choice of what recipe we are going to use.
Bottom line: Ask which ingredient is actually scarce in a given business. That is where the strategy problem is.
For most businesses the binding constraint is not whether you can build it, but whether anyone wants it enough to pay for it.
For something like 80 percent of businesses, especially in consumer goods and services, the critical thing to do is to validate the opportunity - that there are people with the problem, that you actually have a problem that you are solving that people want solved, and, most important, that they are going to pay money for it.
Whether customers want something is one of the hardest things to figure out. It is very often easy to figure out whether you can technologically do something, and whether you can afford to sell it at a given price. The question is, do customers really want it? If there is a genuine need from enough customers and that is confirmed, then marshaling the capital, the resources, the time, the employees, and the know-how becomes a little bit easier to figure out. That is the internal thing. The external thing, what customers want, is one of the hardest things to figure out.
There are exceptions, and they are instructive. Take a venture like curing cancer. If you could do this, the demand is pretty outstanding - this is a malady a lot of people suffer from, it is very fatal, and of course people want it done, so the market would be there. The hard part of this challenge is actually doing it. With scientific breakthroughs that are going to save millions of lives, we do not worry about whether there is demand. What we worry about is actually doing it.
Understanding your value proposition means understanding your customer, and that is a tricky business, because businesses are not purely technocratic. People have needs but they do not necessarily tell you exactly what they are, nor sometimes do they even know. People are notoriously not very good at articulating what they want, and sometimes they do not want to tell you because they are uncomfortable revealing it. The ability to see through what customers say to what they mean is a key competitive advantage, and it is tough to do - which is why people spend a long time investing in knowing their particular set of customers.
And of course there is a commitment, because sometimes people can like something. People say they like something. They could actually really like something, but it comes down to a willingness to pay. For you to get the revenue from a customer, your value proposition has to be compelling enough to make them part with hard-earned money and choose your thing over the alternative of keeping the money where they could spend it on something else. Want and value are two different things.
You can run this on yourself. You are attending a college, an alternative among many, so what is compelling about this particular place, and what kind of student would find it compelling? People talk about education quality, and it does differentiate programs, but so does the perception of quality, because it is not something we could necessarily know very well - it is just something we kind of get a vibe about.
Bottom line: Before you spend a dollar building it, spend the time finding out whether anyone will part with a dollar for it.
Businesses run on execution, improve through optimization, and get remade through business model creation - and decision makers work on all three.
There is the execution: doing the thing you are trying to do, executing the recipe, the day to day. Following instructions and doing what we know we need to do. A business does not exist without it.
There is one level above that. Every single time you think about doing something, there is potentially another way of doing it better. Could we work a little harder? Are the things we are doing the right things, so we can refine them for 5 to 15 percent gains? Those small continuous incremental gains are part of what keeps you in front of others who are all doing the same thing.
Then a more radical change might be a new business model: bringing a new business into existence, or reformulating one that is not working. This is a big reflective exercise, and you have to finally ask what is the value we are creating, how do we do that, is it working now, why or why not, and how might that change. This is where some of the most exciting work happens, and to do it without getting disoriented you really have to ground back to this theme: what are we here to do, has that changed, and what are the fundamental pieces of what it means to create value?
Bottom line: Level one keeps you alive and level two keeps you competitive, but level three is where businesses are actually made - and only if you stay anchored to the value question while you do it.
Doing something valuable is hard, so the payoff on learning how comes from doing it again and again.
A business is a dynamic thing. Think about it as a repeat game, and think about yourself as a customer - one time you purchased food here, another time you purchased food someplace else, and on any given day you might change your preferences. The world is dynamic.
You have identified a problem, built a product, and sold it to a customer, and it is working. That does not mean it always has to work. People drift in their preferences, the number of those people can move, other things come up that solve their problem and take their attention, and your costs could go up in a way that changes your profitability. It helps to have stabilizing things - a brand, a reputation for delivering specific value - so customers come to you again and again. That is good, but nothing can be taken for granted.
Everything behind you moves too. You will have suppliers, and the supply could change, the price could change. Technology changes: we have one great way of doing things, but things could get better, or our recipe could get worse relative to what is now available, and always monitoring whether this is the recipe we want to stick with is something good business leaders do. So can capabilities - people who work for you may not be there tomorrow, so you need a systematic way of attracting, retaining, and training people, knowing that some of them will not stay. You really have to be a system builder, and you have to do it in a dynamic environment.
Now, why do we have to do it over again? Is it not okay just to do it once, like one amazing performance? Here is the thing: doing something valuable is hard to do. The more often we can do it repeatedly, the more all that time we took to learn one thing creates value for us. If you spent a lot of time learning how to do one great thing, like perform one great musical performance, and you only had to play it to exactly one person once, that would be a lot of time spent for a little value created. If you had a bigger audience, if you had multiple audiences, if you play this every weekend - now we are talking.
There are four distinct reasons repetition pays, and they are worth separating because different businesses live on different ones.
The customer relationship. If you have a customer, it is better to sell to that customer over and over again and provide them value over and over again. Why? Because it took some time and effort to get them to know you, for you to get to know them, and to know that you both want to do business. Now that you have that relationship, by default you do not have to go through that decision-making again.
The assets and the supply. If you buy assets from people, it is good to know that relationship as well, and it is good to buy the same thing because you know that things work. If part of your value offering is some component, and that component is used a lot and at scale, then getting a reliable supplier who can always provide the same product with the same specification and the same reliability becomes really important.
The learning curve. The more we do things we have done in the past and know from practice, the further we come down this learning curve. We are better, we are more efficient, and we see ways we can improve - and we improve more readily when we are working on something familiar, little by little.
The technology. We get to know the recipe that we are using, and very often it is best to use what you are comfortable with. At the same time that could be a trap. You do not want to get too locked in.
Which one matters most depends on what business you are in. When you have very few customers and they are very, very valuable, that relationship really matters, so getting the most out of it really matters. There are some types of businesses where if you do not have repeat business you are just going to do a one-off, because it is so hard to learn how to work with them and there is not much margin in the first one - people will take losses on the first job they do with a customer, knowing that if it leads to future jobs they will get more efficient and learn how to work with them more effectively. For a business where raw materials are a bigger share of the value being delivered, supplier reliability is the one to watch instead.
So it is not that one of these four matters the most. You have to know what game you are playing, and which of these dimensions matters most in it, so you can pay attention to it and manage it.
And this is not only true of businesses. Life is a repeat game. We are going to be doing interactions over and over again with each other, and we very seldom just walk away. What goes around comes around, and when you see somebody you worked with before, you are going to remember how you felt and how you were treated beforehand.
Bottom line: Almost everything worth doing requires a repeat system, because the learning and the investment only pay for themselves across many rounds.
Your most common competitor is not another company - it is a person deciding to keep doing what they are already doing.
Competition is often viewed through athletics. It is something we can identify very quickly: we are competing with people who look like us, doing the same thing as us, going after the same things we are trying to do. A lot of people think about competition really narrowly - the rivals who are solving the same problem in the same way for the same customers.
You compete with the status quo, and a lot of founders and entrepreneurs forget this. You are competing with someone in their life just doing what it is that they are doing. Perhaps you have a product that would be great for them, but right now they are getting through life without it, and if they do not really recognize they have a problem, then considering it and deciding to act is all a lot of work.
It is worth being concrete about how much work. To integrate a new offering, someone has to be aware of it, consider it, think about it, think about what else they could do instead, take a risk that it may not work, think about learning how to implement it, actually do it, and then monitor whether it was worth doing - all on top of everything else they are already doing. That complication makes the status quo very attractive. It is why you have to create overwhelming value, not just marginal value, to get people to adopt.
How hard that competitor is depends on how big the problem is. If someone is stuck on the side of the road with a flat tire and you are selling tires, you have their attention. If you are trying to save five minutes of someone’s day, five minutes is really valuable, but there are a lot of things competing for their attention.
You compete with your customers. They might choose to perform some of the service themselves. If you are a cleaning service, they might say this is kind of expensive and they could probably just do it themselves. Any time you provide value but charge a high price, you incentivize customers to wonder whether they should find someone else, or do it on their own. You are always in a trade-off between the price you charge and the value you create for them.
You compete with substitutes. If you are a hot dog vendor you might think you compete with other hot dog vendors, but what else does the job of a hot dog? Somebody might eat a hamburger instead, or a bowl of cereal, or just go without lunch that day. So much software has been killed by Google Docs and Google Sheets, because people cobble together a good enough solution out of general tools instead of buying something dedicated that is expensive and has to be learned.
You compete for talent. You can buy equipment and there may be enough to go around, but people who really know how to do things are always wondering whether they want to work for you or somewhere else. And what they weigh is not just what you pay but the total offer - people want to grow, want to thrive, enjoy their work, and want to have meaning.
You compete for capital and assets. Machines do not have feelings and do not care who owns them, but we compete for them on price, because a lot of people can use them just like we can. If a machine can be used to make $100 dishes, the same thing can also make a $5 burger, and it is difficult to be the $5 burger person, because you are buying an asset someone else can create more value with. We see this in labor markets, where people who are really smart get pulled out of manufacturing into finance because those firms can pay them more.
Bottom line: If you only watch your nearest rival, the game that you are playing can suddenly change without you realizing it.
Profit is evidence that you are probably creating value - it is not the thing you are doing.
A lot of people think businesses pursue profitability as an end in itself. Profitability is a symptom that you are doing something right. It comes from either increasing revenue or decreasing cost, and what that really means is you got a lot more customers, or customers like your stuff a lot more, or you can marshal resources in a more efficient, rationalized manner to deliver the same thing. It is an indication that we are on the right track.
But it is only an indication. Just because you look at these numbers does not mean it is going to be sustainable, and it could be a downward spiral. Imagine we arbitrarily raise costs on people who could not change. They might take that the first time, but now they are starting to look at what other alternatives exist besides you, because they did not like how you gouged them. Or we substitute something cheaper and lower quality, and the people who liked our quality in the past might take a while to figure that out - and once they do, they might substitute away from us. There are no shortcuts here. Short-sighted cost-cutting or price hikes might work in the short run, but it is not something you can rely on in the long run.
There is an error in the other direction too. Not all real value has to be captured, and just because in theory you are creating it does not mean it hits for everyone. We also should not think too slavishly that every single thing we do has to create measurable value or else it is not worth it. The existence of woolly items does not mean that no data matters, and it also does not mean that only the things we can measure matter.
If we reduce this to numbers, value created and resources used come down to revenue and cost. Revenue is a function of volume and price - more customers raises it, and so does a higher price, and the way you raise price is to produce more value for the customers you have. On the other side, if you are more efficient, or find cheaper inputs that still satisfy the customer, you reduce cost - either fixed costs, which do not change no matter how much volume we are creating, or variable costs, which do.
Bottom line: Profits come to those who create value and learn how to capture a piece of it in a sustainable way. Chasing profit directly is myopic, and you will not see the possibilities in plain sight.
Value creation is not automatically a good outcome for everyone, and the fact that it happens does not settle whether the arrangement is a desirable one.
Businesses can create winners and losers, primarily because it is a competition - someone is getting picked and someone is not. That is obviously good for some people and bad for others.
There are two ways of putting this. Often it is about a choice and those who get chosen. The ones not chosen are losing, but that competition creates an incentive to create the very best out there, and whoever is the end consumer is winning through that dynamic competition.
The other thing is that it is not always a zero-sum game. The pie is not fixed. If we can find some way to create more value out there in the world, there are ways that we can both win. Some people might win more than others, and that can feel like losing, but it is important to understand that competition and cooperation can sometimes come from the same opportunity. We have to be mindful about how we feel here - about improving the situation from our customer’s perspective and improving our own situation, rather than worrying about whether we are doing better than somebody else.
There is a related point that gets lost in most arguments about business. All economies have rules. The whole idea of a free market that does not care about anybody - that straw man does not exist anywhere. There are always going to be some rules in every economy, and we need that for an economy to work well. It is not to say that unfettered capitalism is bad and therefore all capitalism is bad; almost all capital exists in a regulated economy. What matters is that we have good rules, so the economy works well for the most people and so corruption does not ruin it.
So when you evaluate a business in this course, hold two questions at once: is value being created, and who is it being created for. That something happens does not make it a desirable end state, and designing good rules requires understanding the underlying forces first - which is what the rest of this book is about.
Bottom line: Ask not only whether value is created but who captures it, and remember that the rules shaping that split are themselves a design choice.
The value creation framework is not just for a business - it is the most reliable way an individual accumulates the freedom to do what they want.
One of the things we learn about, with the whole value creation framework, is that it is not just for our business but for ourselves. Solving other people’s problems is a good thing - first of all it is just doing service in the world, but importantly, the better you are at doing this, the more degrees of freedom you are going to have.
Why is that? Everything we want to do in life - to learn, to invest, to widen your impact on the world, to have experiences, to see things, to travel, to try things - all of it takes resources, and the question is how we get them. Absent capturing and pillaging and taking and stealing, they come from people, in exchange. When you can enrich your life by enriching theirs, and you find many different and creative ways to help people solve problems, you create for yourself an endless set of opportunities to assemble resources to do what you particularly like doing.
What is important is not solving theoretical problems - problems that people should have, or think they should recognize that they have - but problems people actually do have. They have to recognize the problem first. If you are solving one that people do not think they have, do not want to have, or do not believe they have, this is not something they will give you resources for. Sometimes people do not understand the opportunity you present, and either you realize this is not something you are going to do, or you find a way to convince them and create a market that did not exist. It is just as important to create the recognition that value exists as it is to create the value.
And the harder the problems, the more this motivates customers to work with you, because the alternatives - a competitor, doing it themselves, or just living with it - all become less attractive. In a world where we are not sure what jobs will exist, what problems will exist, or what problems AI will solve, one thing we can always know is to try to be useful at solving problems, and to solve harder ones - problems that are harder for AI to solve, harder for other people to solve. It makes you indispensable and it makes you valuable, and being valuable is what puts you in a good position to have more agency.
Bottom line: Get good at solving problems people actually have, and the resources to do what you want tend to follow.
So, the business program. Almost everything on the worry list is solvable - the recipe is discoverable, the demand is there, and the resources can be assembled with enough money and time. The ingredient that binds is resources, and not in the sense of a budget line. It is that the competing schools have natural endowments a liberal arts college does not: an MBA program to draft off, a critical mass of faculty who came for each other, and a bigger base to amortize all of it over.
Which means the answer cannot be to match them on resources, because you cannot. It has to be something that plays to your customers in a way that cannot be replicated - something special about how you teach, how you deliver, the intimacy of it, the fact that you are not just running cookie-cutter MBA courses but doing something specific for undergraduates. There has to be something special where you have leverage and where the bigger, more traditional, resource-endowed schools cannot follow.
That is the shape of every question in this course. Find whose problem you are solving and what they would otherwise do, get honest about which ingredient is actually scarce, and only then start doing arithmetic. We are going to start with costs, because that is closest to us and easiest to understand. You might even say it is boring. That is a mistake, because many a good decision has been sacrificed because leaders did not understand their true costs.
[LO1] Name a product that you liked enough to buy, but do not really love. What problem was it solving that motivated the purchase? What could you have done instead, and why did you pick this instead of other things, including doing nothing?
[LO1] Pick one of the comparisons introduced earlier in the chapter - dining hall versus grocery shopping, Airbnb versus hotel, gym versus home, Google Docs versus Word. Which of these would still be valuable if the product got slightly worse? Explain what your answer says about where the value actually comes from.
[LO3] Pick a company you know well. Besides direct rivals, which competitor matters most to it right now - the status quo, its customers, talent, or capital? Why?
[LO4] A founder says their pricing model is working because margins went up two quarters in a row. Give two distinct reasons that might not be evidence of value creation, and say what you would want to look at instead.
[LO5] A new delivery platform makes food cheaper and faster for customers and gives restaurants more orders, while cutting what drivers earn per hour. Has value been created? Say what you would need to know to answer, and explain who you think should have a say in the rules governing that arrangement.
2-1 Analyze a Business Model. [LO1, LO2, LO3] Choose a familiar product or service and work all five lenses: (a) the problem solved - for whom, and against what alternatives; (b) the resources and assets that make it work; (c) the technology as recipe - what method makes it effective; (d) the capabilities - what is hard to copy; (e) the competition lens - status quo, rivals, customers, talent, capital. Close by naming which single ingredient binds and what you would do about it.
2-2 Which Ingredient Binds? [LO2] For each venture, name the binding ingredient and defend it in two or three sentences: (a) a campus food truck; (b) a therapy that cures a common cancer; (c) a business program built from scratch at a liberal arts college. Then explain what a founder should do differently depending on which ingredient binds.
2-3 The Telegram Problem. [LO1, LO3] Telegram has features WhatsApp does not, and by several measures it is the better piece of software. Most people still use WhatsApp. Using network effects and the status quo, explain why better features are not enough. Then state specifically how much better “enough better” would have to be, and for whom, before a switch actually happens.
2-4 Create More Value. [LO1, LO4] Pick a business you use weekly. Name one concrete way it could create more total value next semester - not capture more of it. Say who would be better off, by how much you would guess, and what it would cost the business to do. Then say how you would know within a semester whether it worked.
© 2026 Eric Lin. All rights reserved. This chapter is provided for students in BUSI 103 - please do not repost or redistribute without permission.