[MUSIC] In our first module, we said that one of the key concepts behind a VCAP framework is the need for alignment between the operating system, that is the assets and processes, and the capabilities the firm is trying to deliver. The main driver behind the need for alignment is the trade-off the firms face when designing their operating system. There is no operating system that can be good at everything. Next, we will explore the concept of trade-offs from both the customer point of view and the operational point of view. View. Once we have a better understanding, we will use trade-off curves to assess competitive risk. Now, a trade-off is a balancing of factors, all of which are not attainable at the same time, giving up on one thing in return for another. We acknowledge trade-offs when we say, you can have it both ways. Trade-offs require customers and firms to make choices. Trade-offs are at the heart of strategy because they determine market segmentation and they prioritize operational capabilities. Let us first review how we can capture customer trade-offs and then discuss how a similar concept applies to operations. As customers, all of us make trade-offs in our needs when making a purchase. When buying a car, we may trade-off aesthetics, performance, and safety while attempting to keep our budget constant. As discussed in module one, any product or service can be characterized by the four dimensional attribute bundle of cost, timeliness, variety, and quality. Just as individuals face trade-offs, so do organizations. A finite endowment of wealth and time limits the number and extent of objectives that an organization can obtain simultaneously. Operational trade-off curves show the process cost to deliver a specific combination of quality, response time, and variety. The appropriate type of cost depends on the situation. For example, marginal cost is important in competitive settings where existing processes. While full unit cost is important in the planning phase of a new process. These costs are specific to the operating system and thus are shaped by the operations strategy. We will next use the idea of these trade-off curves to answer two important questions. Is my position defensible from an operational point of view? And how will costs change as I scale? We're first going to explain the main idea. We will then walk you through a simple example step by step. [MUSIC]