Competitive Analysis

 Chapter: Structural analysis of industry

 What is industry?

Industry consists of homogeneous firms which produce same product and distribute to the same types of customers.

In another way industry can be defines as the group of firms producing products that close substitutes for each other.

Industry is consists of firms and firm is the single unit of industry. The function of firm is to accumulate the input for producing finished product.

The structures of industry analysis are changed with the change of business market. Buyer need is related with structural analysis.

 

Competitive analysis is the analysis of competition for a business is going to compete. Competitive analysis helps the business to determine what its goal should be, and what policies will be needed to carry out those goals. Competitive analysis is the analysis of competitors & their competitive position in the market to achieve or to get competitive advantages. We know that the base of competition is as

a. Quality base

b. Cost base

Some companies create entry barriers and increase their market share through providing quality product and some provide the less cost product. So we can say that the advantages of the product may be two types

a. Less cost

b. Greater performance

To know the organization or its product we must know the value chain system of that organization. Value chain of an organization is as like as the anatomy. Value chain system of an organization can ensure that this organization will be able to compete in the competitive market or not.

 

Five factors make structure of industry .these are….

This structure is given by Mical Porter.

1. Entry barrier: It is the barriers for the firm at the time of entering into industry. Govt. rules & regulation, competitor’s strength, and regulations by the firm. If the entry barriers are the strong then the entry of new entrants will be low. So, in that situation for the existing firm, it will be easier to survive. By increasing the cost of getting entry, it is possible to create entry barriers.

2. Bargaining power of supplier: Suppliers who provide the raw materials as well as factors of production. The bargaining power of supplier determines the cost of raw materials and other inputs, we know that…                                      

      V=b/c>1                        Here,     V= value, C= cost, B= benefits.

So, if a firm wants to create value for the product then benefits must be higher than the cost. Suppliers are the vital part in value chain system, so the bargaining has the great impact on the industry structure analysis.

3. Bargaining power of buyer: The bargaining power of buyer influences the price that firm can change as like as substitute products. Bargaining power of buyer also can influence cost and investment (costly service may be demand by the buyer). Buyers may be two types on the basis of uses……..

a. Buying for own or family consumption: The buyers who buy the product for their own consumption and finish the utility of the product.

b. Buying for further production: They don’t buy the products for their own consumption. They buy the products for further production. They buy for reselling.

4. Impact of substitutes: To fulfill the demand of principles goods if we can use another goods then it will be treated as substitutes goods. The substitute product will create same value and same function of the principle products. So, the entry of substitute products or the marketing strategy of substitute products has great impact in the industrial structural analysis.

5. Intensity of rivalry among the companies: It is the process by which the marketer keep up their current customers and attract new customer who are the customer of other company or policies to make the customers as their customer. So we can say that is done to.

Ø Attract the customer of other company.

Ø Create the new customer for the product.

Ø Retain the current customer.

 

New entrants to an industry bring new capacity, the desire to gain market share and often substantial resources. The threat of entry into an industry depends on the barriers of entry that are present, coupled with the reaction from existing competitors that the entrants can expect. If barriers to entry are high then the potential entrants will be low and vice-versa. Barriers to entry can be shaped from under mentioned sources.

1. Economic of scale: Economic of scale is possible if input and output is positive per unit of product. Economic of scale discourage entry by forcing the entrants to come with large scales. It is a strong reaction from existing firms. For example, scale economics in production, research, marketing, service are probable the key barriers to entry in the mainframe of an industry.

2. Absolute cost advantage: if the business cost of a firm is lower than its competitors but the benefits are high then it is called absolute cost advantage of that firm. Competitive advantage cannot be gained if the firm does not possess to a relative enjoyable cost position. It is possible through low cost physical distribution system, a highly efficient assembly process or superior sales force utilization.

3. Brand identity: Product identity means that established firms have brand identification and customer loyalties, which is gained from past advertising, customer services, product differences. If there exist strong brand loyalty then the customer will not switch. So, brand identity will create strong entry barriers.

4. Access to distribution channel: A barrier to entry can be created by the new entrant’s need to secure distribution for its product. The more limited the wholesale or retail channels for a product are and the more existing competitors have these tied up, obviously the tougher entry into the industry will be.

5. Switching cost: Switching cost is the cost to attract the customers of other’s brand as our customer. If the customers are not too much loyal to another brand then the switching cost will be low. When customers are loyal to a brand then they are not ready to change that brand because of psychic cost, perceived risk etc.

6. Govt. policy: The last major source of entry barriers is government policy standards for product testing common in industry like food and other health related products can impose substantial lead times which will raise the capital cost of entry. Because, of imposing high tax sometimes new entrant cannot enter into industry because increasing price.

 

Supplier means who provide the raw materials as well as factors of production. The bargaining power of supplier determines the cost of raw materials and other inputs. The bargaining power of the supplier depends on the following factors--

1. Supplier concentration: If the sources of supplier are limited then the buyers will buy the products without thinking its price and quality or without bargaining. If individual buyer depends on individual supplier then the producer will not have alternative sources. Here, price is fixing by the suppliers so it creates strong entry barriers to new entrants.

2. Number of buyers: If the numbers of buyers are lower and the numbers of suppliers are more than that will be negative for the supplier and positive for the buyer. Here, the bargaining power of buyer will be high. So, entry barrier will be weak here.

3. Switching cost: If there are alternative sources of raw materials then the existing producer can switch from one supplier to another supplier and switching cost will be lower here. But if there are no alternative sources of supply of raw materials then entry barrier will be strong here.

4. Substitute of raw materials: If there is substitute of principle raw materials then the bargaining power of supplier will be low. If the supplier wants to charge high price then the producer or buyer switch to the substitute.

5. Threat of forward integration: If the supplier starts to produce the product instead of supplying the raw materials then the original producer will be in threat. For example, if the producer of sugar cane starts to produce sugar then sugar producer will fall in danger. It can be shown by below chart.              

 

       

 

The bargaining power of buyer influences the price that firm can change as like as substitute products. Bargaining power of buyer also can influence cost and investment (costly service may be demand by the buyer).

1. Buyer concentration: If the number of buyer is limited but the number of supplier is more then the bargaining power of the buyer will be strong here. Here the sources of supply will be more as a result it will impact the supplier negatively.

2. Number of supplier: If the number of supplier is lower but the number of buyer are more then that will be negative for the buyer. Here the bargaining power of the buyer will be weak.

3. Switching cost: If there are more competitors or substitutes then the buyers can switch from one seller to another seller and switching cost will be lower here. But if there are no competitors or substitutes then entry barrier will be strong here.

4. Substitute products: If there is substitute of principle raw materials then the bargaining power of supplier will be low. If the supplier wants to charge high price then the producer or buyer switch to the substitute.

5. Threat of backward integration: If the industrial buyer start to produce the raw materials instead of buying from the supplier then that will be threat to the supplier. It is known as backward integration.

 

1. Functional similarity: If there is functional similarity then the area of firm will be larger, which lead the higher competition. For example, to go anywhere we use rickshaw, van, motorcycle, bus, car, etc. here all these are substitute to each other. As a result these will not form several industries.  All these will be the part of transportation industry. So, ultimately here competition will be high.

2. Price performance trend: There must be relevance between price and performance depends on how much expectation is fulfilled by the product and how much price it is charged. Customer always thinks how much money they are providing and how much performance they are getting. If price is higher than the performance then they will switch to substitutes product.

3. Product identity: In case of branded product the customers are very much loyal to the product. Here the customers do not easily switch to the substitutes product. So, in case of branded product the impact of substitute is very low.

 

The degree of rivalry depends on the following factors.

1. Number of competitors: It depends on the market structure. If there are huge competitors then it will create competitive market. So, here the degree of competition will be high. If there are one or few competitors then it will create monopoly market and there will not exist competition.

2. Industry growth: If the industry growth is positive then the demand will be high or increased. If demand increase then new firm enter into industry and which will increase the degree of competition. For example, the mobile network industry growth is high which leads to the increase of demand as well increasing the number of firms in this industry.

3. Assets intensity: If a firm need huge assets to enter into industry and it is difficult to collect or there is less sources of capital then the entry barriers will be strong.

4. Product differentiation: If the existing firms always maintain production differentiation then the entry barriers will be strong, because through the differentiation, the existing firms retain their customers very well by fulfilling their dynamic demand because of that customers will be very much loyal to that firm.

5. Exit barrier: Exit barriers create strong barriers. Exit barriers mean the barrier which is faced by the firm if they want to exit from the industry. Exit barriers occur because of below reasons….

a. Emotional barrier: Sometimes some firms do not want to exit from industry instead of loss in business because of emotional attachment to the industry. Management will reluctant to exit decision is caused by identification with the particular business, loyalty to employees, fear for one’s own career, pride and other reasons.

b. High fixed cost: Because of high fixed cost it is difficult to exit from the industry. If one invest large amount of capital in an industry then he or she cannot exit from the industry at any time because in fixed cost include labour agreements, resettlement costs, maintaining capabilities for spare parts, and so on. So here, exit cost will be very high.

c. Govt. and social restriction: For the govt. and social restriction firms cannot exit from the industry at any time because, the income of huge population is related with this. If that firm exits from industry then many people will lost their job because of that government and social restrictions will be created here.

d. Specialized assets: When a firm uses specialized assets to produce product then if that firm exit from the industry, they will not be able to sell the specialized assets to others and these will have low liquidation values or high costs of transfer or conversion.

 

Industries profitability depends on how an industry or firms within the industry structure are meeting the buyer's needs and how they maintain the supply-demand balance. The core of success in the business to satisfy the buyer needs. We want to know how this relates to the concept of industry structural analysis.

The strength of five competitive forces (potential entrants, intensity of rivalry among the existing competitors, bargaining power of the buyers, bargaining power of suppliers and pressure from substitute products) is a function of industry structure. These five forces can positively or negatively influence profitability.

On the other hand, the buyer must be willing to pay price for a product that exceeds its cost of production; otherwise the industry will not survive in the long run.

The considerable factors in the case of analyzing the buyer need and industry structure are given bellow-

1. Satisfying the buyer need is prerequisite: To satisfy the buyer need is the prerequisite of any industry. The more the buyer will be satisfied, the more the profitability will be. Otherwise the firm or industry will face losing concern.

2. Entry barrier: Switching cost hinder the new firm to enter in the market because the more satisfied and loyal buyers will not switch to the new product. For example majority of the customer of GP will not switch to other Tele-communication company because of the brand image.

3. The threat of substitute product: The substitute products influence the buyer to buy the product. If the varieties of substitutes are in the market and can satisfy the buyer as same as the principal product, the buyer will not have the interest to the principal product.

4. The power of the supplier: If the suppliers increase the value of the raw-materials then the price of the product increases. Then the buyers fall in a trap and become dissatisfied.

5. The intensity of rivalry: The competitors always come up to the market offering the products having differentiation or the less cost. According to the value of the product the buyer intends to pay the price.

7. Satisfying the buyer need determines the profitability: Profitability specially depends on the cost and sales volume. Sales volume depends on the buyer satisfaction. The firm or industry will fail to achieve their goal e.g. profitability if the buyers are not satisfied.

So, to maximize the profitability the owner of the firm and industry must have the knowledge about the buyer need and its consequences to sales volume.

 

Common view about profitability is that – profit are a function of the balance between supply and demand. If demand is greater than supply, this leads to profitability. Yet the long term supply demand balance is strongly influenced by industrial structure, as are the consequences of a supply demand imbalance for profitability. Hence, even though short term fluctuations in supply and demand can affect short term profitability.

Supply and demand change constantly, adjusting to each other. Industry structure determines how rapidly competitors add new supply.  So if there exist supply over demand then the new firm will enter into market and add new supply. But if supply and demand is balanced then the others firms will not be able to enter into industry easily. The existing firm should balance demand and supply by changing demand or supply to create strong entry barriers. Excess demand and excess supply both are harmful for a firm. So a firm should concern about the balance of demand and supply.

 

Common view about profitability is that – profit are a function of the balance between supply and demand. If demand is greater than supply, this leads to profitability. Yet the long term supply demand balance is strongly influenced by industrial structure, as are the consequences of a supply demand imbalance for profitability. Hence, even though short term fluctuations in supply and demand can affect short term profitability.

Supply and demand change constantly, adjusting to each other. Industry structure determines how rapidly competitors add new supply. Here below forces play key role-

Ø New entrants can bid down prices.

Ø Existing firms will expand capacity aggressive or choose to maintain profitability that depends on intensity of rivalry.

Ø Exit barriers keep firms from leaving an industry due to high capacity.

Thus industry structure shapes the supply and demand balance and the duration of imbalance. The consequences of an imbalance between supply and demand for industry profitability also differs widely and it depending on industry structure. Because price war can be started due to the entrance of new firms and buyers bargaining power will be increased so that industry structure will also be in under pressure.

Thus industry structure is fundamental to both the speed of adjustment of supply to demand and the relationship between capacity utilization and profitability.

  

		Chapter: Competitive analysis within the industries

 

The possible differences among a company’s strategic options in a given industry is determined on the basis of some activities is called strategic dimension.

A company takes its strategy in a given industry based on dimensions of competitive strategy and implement according to its capabilities. For example: in medicine industry Square & Beximco follow different strategy based on different dimension as per their capabilities.

The following strategic dimensions usually capture the possible differences among a company’s strategic options in a given industry. Dimension of competitive strategies are given below-

1. Specialization: Mainly Company focuses in terms of the width of its product line, the target customer segments, the geographic market served.

2. Brand identification: It’s another strategy for any company which may differentiate their product to other competitors. Brand identification based mainly on price or other variables. It can be achieved through advertising, sales force, after sales service etc.

3. Push Vs pull strategy: A promotion assumed aimed primarily at middlemen & product is pushed the much his channel. On the other hand pull strategy, promotion program directed primarily at end users. The intention is to motivate them to also retailers for the product.

4. Channel selection: The choice of distribution channels ranging from company – owned channels to specially outlets to broad line outlets.

5. Product quality: It should be measured in terms of raw materials, specification, features, and so on.

6. Technological leadership: The degree to which it seeks technological leadership Vs following or imitation. We should be clear that, a firm could be a technological leader but deliberately not produce the highest quality product in the market; quality and technological leadership do not necessarily go together.

7. Cost position: The extent to which it seeks the low cost position in manufacturing & distribution through investment in cost-minimizing facilities and equipment.

8. Service: The degree to which it provides necessary or supporting services with its product line. Such as engineering, assistance, an in-house service network, credit etc.

9. Pricing: Its relative price position in the market. Price position will usually be related to such other variables as cost position and product quality, but price is a distinctive strategic variable that must be treated separately.

10. Leverage: The amounts of financial leverage (the ability to influence) and operating leverage it bears.

11. Relationship to home & host government: Government can provide resource or other assistance to the firm, or conversely can regulate the firm or otherwise influence its goals. Host government often plays similar roles.

12. Vertical integration: The extent of value added as reflected in the level of forward & backward integration adopted, whether the firm has captive distribution, exclusive or owned retailed outlets, an in-house service network, and so on.

The above mentioned dimensions of competitive strategy provide an overall picture of the firm’s position.

 

Basically a strategic group is the group of firms in an industry following the same or similar strategy along with strategic dimensions.

Generally an industry can create same strategic target market, strategic base & segmentation with in a same company, that’s create a group & this group is called strategic group.

For example: An industry could have only one strategic group or different strategic group e.g. broad product lines, heavy national advertising, extensive integration & captive (inclusive) distribution & service characterize one strategic group.

Another strategic group can consist of specialist producers focusing high quality, high price, & segment with selective distribution.

Another group may produce unadvertised products for private label (brand).

 

Strategic group may raise or lower profit potential for all firms in the industry, but not all strategies on the industry have equal profit potential. The under mentioned characteristics of strategic group may raise the average profit potential of firms-

1. Strategic group & the mobility: The higher the mobility barriers protecting the strategic group. If there is a high entry barrier of company in case of mobility, then other company will not enter to the concerned strategic group without high performing company. It raises the average profit potentials of strategic group.

2. Strategic group & bargaining power: The stronger the groups bargaining position with suppliers & customer. If the bargaining power of strategic group is high with the supplier and customers then the profitability will be increased. Because they will get raw materials at low cost and sell the finished product at optimum price.

3. Strategic group & the threats of substitute product: The lower the group’s defenselessness to substitute products. If the defenselessness of strategic group is lower to substitutes then it may raise the average profit potential.

4. Strategic group & the rivalry among the firm: The less exposed the group is to rivalry from other group. If the strategic group exposed less competitive mood then others will not take aggressive strategy which will increase their profitability.

		Chapter: Generic Strategy

 

Michel Porter argued that a firm’s strengths ultimately fall into one of the two headings:

          1. Cost advantages and

          2. Differentiation.

By applying these strengths in either a broad or narrow scope, a firm can take any one generic strategy from the three potential successful generic strategies. These are…

        1. Cost leadership.

        2. Differentiation.

        3. Focus. 

                   a. Cost focus.

                   b. Differentiation focus.

4. Stuck in the middle (cost leadership & differentiation simultaneously)

These strategies are applied at business unit level. They are called generic strategies because they are not firm or industry dependent. The following table generates Porters generic strategies

Dimensions	Cost leadership	Differentiation	Focus
Product differentiation	Low (mainly by price)	Premium price	Low/premium price
Market segmentation	Low (mass market)	High many market segments	Low or one r few market segments
Distinctive competence	Manufacturing & material manufacture	R&D, sales & marketing	Any kind

1. Cost leadership strategy: Through cost leadership, a firm sets out to become the low cost producer in its industry. That means under this strategy, a firm tries to reduce its cost as much as possible to gain sustainable competitive advantage.

2. Differentiation strategy: The second generic strategy is one of differentiating the product or service offering of the firm, creating something that is perceived industry wide as being unique but charging the premium price, not high price.  It should be mentioned that the differentiation strategy does not allow the firm to ignore cost.

3. Focus strategy: The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. It focuses on-

a. Particular buyer group

b. Segment of the product line

c. Geographic market.

Besides, the above three successful generic strategies, another generic strategy is also seen if any firms failed to develop its strategy, at least one of the three direction. It is-

4. Stuck in the middle: It is neither cost leadership nor differentiation. It is an extremely poor strategic situation. Under this strategy, a firm does not get any competitive advantages. These types of firm do not have-

a. The market share.

b. Capital investment.

c. Decide to play low cost game.

Finally we can say that three generic strategies are available for a firm to gain sustainable competitive advantages

 

Each of the generic strategy involves a fundamentally different route to achieve competitive advantage. The cost leadership and differentiation strategies seek competitive advantage in a board range of industry segments but focus strategies aim at cost advantage or differentiation in a narrow segment. The specific actions which are required to implement each generic strategy vary widely from industry to industry. 

Actually, competitive advantage is the heart of a generic strategy and achieving competitive advantage requires a firm to make choice such as-

a. The type of competitive advantage it seeks to attain

b. The scope within which it will attain.

It may be mentioned that effectively implementing any of these generic strategies usually requires total commitment and supporting organizational arrangements. Various strategic options which are required to implement each category of generic strategy are given as follows—

1. Cost leadership: To implement cost leadership strategy, the strategic options which are required are given below-

a. Required skills and resources:

Ø Heavy capital investment.

Ø Engineering skills.

Ø Intense supervision of labor.

Ø Product designed for case in manufacture.

Ø Low cost distribution system.

b. Common organizational requirement:

Ø Tight cost control.

Ø Structured organization and responsibilities.

Ø Cost minimization in R&D, Service, Sales force, Advertising etc.

Ø Cost reduction from experience.

2. Differentiation: Some strategic options which are required to implement differentiation strategy, are given below----

a. Required skills and resources:

Ø Strong marketing abilities.

Ø Product engineering.

Ø Creative flair (natural ability to do something).

Ø Strong capability.

Ø Reputation for quality or technological leadership.

Ø Strong cooperation from channels

b. Organizational requirements:

Ø Strong coordination among function in R&D, Product development and marketing.

Ø Subjective measure and incentives instead of quantitative measure.

Ø Amenities to attract highly skilled labor, scientist or creative people.

3. Focus strategy: To implement focus strategy, the above mentioned required skills and resources as well as common organizational requirement are used at a particular strategic target.

 

The fundamental basis of earning above-average performance in the long run is sustainable competitive Advantage. There are two basic types of competitive advantage a firm can possess:

          a. Low cost

          b. Differentiation

The two types of competitive advantage combined with the scope (range) of activities for a firm seeks to achieve them lead to three Generic Strategies for achieving above-average performance in an industry or in dealing with five Competitive forces for achieving competitive advantage, there are three potential successful generic strategies. These are-

        1. Cost leadership

        2. Differentiation, and

        3. Focus

Each of the generic strategy involves a fundamentally different route to achieve competitive advantage. The cost leadership and differentiation strategies seek competitive advantage in a board range of industry segments but focus strategies aim at cost advantage or differentiation in a narrow segment.

It should be mentioned that effectively implementing any of these generic strategies usually requires total commitment and supporting organizational arrangements.

Now we can discuss the role of each generic strategy to gain sustainable competitive advantage in below way-

1. Cost leadership strategy: Through cost leadership, a firm sets out to become the low cost producer in its industry. That means under this strategy, a firm tries to reduce its cost as much as possible to gain sustainable competitive advantage.

The role of cost leadership strategy to gain sustainable competitive is given as follows-

a. A low cost position gives the firm a defense (protection) against rivalry from competitors.

b. A low cost position defends the firm against Powerful Buyers.

c. Low cost provides a defense against Powerful Suppliers by providing more flexibility to cope with input cost increases.

d. Low cost position also provides substantial Entry barriers in terms of scale economies or cost advantages.

e. A low cost position usually places the firm in a favorable position in relation to its competitors in the industry.

2. Differentiation strategy: The second generic strategy is one of differentiating the product or service offering of the firm, creating something that is perceived industry wide as being unique but charging the premium price, not high price.  It should be mentioned that the differentiation strategy does not allow the firm to ignore cost.

The role of differentiation strategy to gain sustainable competitive is given as follows-

a. It provides insulation (protect something from unpleasant effect) against rivalry because of brand loyalty by customers and lower sensitivity to price.

b. It increases margins, which avoids the need for low-cost position.

c. It helps to deal with supplier power due to the higher margins

d. It clearly mitigates (make less severe) buyer power because of brand loyalty by customers and resulting lower sensitivity to price.

3. Focus strategy: The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. It focuses on-

         a. Particular buyer group

         b. Segment of the product line

         c. Geographic market

The focus strategy has also some significant role to gain sustainable competitive is given as follows-

a. The specialize needs of the target customer.

b. Stocking only their narrow product lines.

c. Order taking procedure.

d. Perfect location of warehouse.

e. Intensive controlling of record keeping.

From the overall discussion we can say that, each generic strategy has significant role to gain sustainable competitive advantage.

 

Generally, it is not possible to pursue more than one generic strategy at a time. Because cost leadership strategy is related with reducing cost and differentiation strategy is related with maintaining product quality.  As a result, under this strategy, product cost will be more. So it will not be consistent to implement both cost leadership strategy and differentiation strategy at a time for the same product.

But there are some favorable condition under which condition, it is possible to pursue more than one generic strategy. These are-

1. Competitors are stuck in the middle.

2. Cost is strategy affected by market share.

3. A firm pioneer is a major innovator in……

a. Introducing a significant technology innovation.

b. Use of robot flexible manufacturing system.

c. Economic of scale.

Finally we can say that, a firm can pursue more than one generic strategy at a time under above mentioned condition.

		Cchapter: Competitor Analysis

 

A specific framework is needed to identify the competitor and to analyze the appropriate strategy. A framework refers a blueprint or structure that helps a company to analyze its competitor’s strength, weakness, future policy etc.

A company must constantly compare its products, prices, channels, and promotional activities with its close competitor, so that it can identify the area of competitive advantage and disadvantage. On the basis of the information a company may launch more accurate attack on its competitors as well as it may prepare a stronger protection against attacks.

 It can be shown by below chart...........

Here, ‘A’, ‘B’, and ‘C’ are the producer in this market and they serve to the consumers. So, we can say, ‘A’, ‘B’, and ‘C’ are the competitor to each other. Only, ‘A’ company cannot meet-up all demand of consumers, ‘B’&’C’ company also meets the consumers need. So ‘A’ company has to analyze its competitor’s strength, weakness, future plan etc. to get the competitive advantage. 

 

If a company wants to forecast the competitor’s response profile then the company must need to analyze four diagnostic or investigative components of competitor analysis. Understanding these four components allow us an informed prediction of the competitors response profile. These four diagnostic components of competitor analysis are shortly described in below.......

1. Future plan.

2. Assumption.

3. Current strategy.

4. Capabilities.

They are summarized in below...........

1. Future plan: To know the competitor’s response profile a company first need to identify the competitor future plan or future goals. Knowledge of goals will allow predictions about whether each competitor is satisfied with its present position and financial result or not. If the competitors are not satisfied, how likely that competitor is to change strategy or to moves by other firms. Knowing competitor’s goals will also aid in predicting its reactions to strategy changes.

The following pin-pointing question helps to determine competitor’s present and future goals such as......

Ø Stated and unstated financial goals.

Ø Attitude of competitors toward risk.

Ø Organizational structure.

Ø Controlling and incentives system.

Ø Accounting and leadership system.

Ø Sales growth and rate of return of the parent company.

Ø Parent company’s diversification plan.

2. Assumption: The second crucial component in competitor analysis is identifying each competitor’s assumptions. Assumptions mean a belief or feeling that something is true or that something will happen, although there is no proof. These fall into two major categories.......

a. The competitor’s assumption about itself: Here, the competitor may see itself as a society conscious firm, industry leader, low cost producer, having the best sales forces.

b. The competitor’s assumption about itself and others: Here, a company has to identify its competitor’s assumption about itself and the other companies in it.

There are some key questions to identify the competitor’s assumption, like-

Ø What are the relative position of cost, product, quality, technology and other key aspect (strength/weakness)?

Ø What are the historical or emotional identification with particular products like- product design, product quality, manufacturing location, selling approach, distribution arrangements etc?

Ø Do they fill hesitate to utilize the full capacity?

3. Current strategy: To forecast the competitor response profile, a firm needs to know the current strategy of the competitor. Here, the main focus gives on, what the competitors are doing and their current business position. E.g. how the firm is currently competing? If the current business position of competitors is good then easily it is assessed that the competitors will follow current strategy in future. If current business position is bad then the competitors will change their future strategy. So, a company should assess the competitor’s current strategy to take the competitive advantage.

4. Capability analysis: A firm’s strengths and weakness will determine its ability to initiate or react to strategic move. So if a firm wants to forecast the competitor’s response profile then the firm needs to analyze the competitor capability. Capabilities can be analyzed by......

a. Strength analysis: Strength impacts positively in a firm.

b. Weakness analysis: Weakness impacts negatively in a firm.

To analyze the capability of the competitors, a firm should know the answer of the following question.

a. What are the competitor’s capabilities in each of the functional areas?

b. How does the competitor measure up the tests of consistency of its strategy?

c. Are there any probable changes in those capabilities as the competitors mature?

Lastly, we can say a firm can forecast the competitors response profile by understanding the above four diagnostic or investigative components of competitor analysis.

 

The main objectives of competitor analysis are as follows...

1. To develop a profile: One of the most important objectives of competitor analysis is to develop a profile of the nature and success of the likely strategy changes each competitor might make.

2. To identify the competitor probable response: A firm analyzes its competitors to find out the probable responses. That means how the competitors may change their strategy in future. For example, if the competitors change their advertisement program then will it be necessary for our company?

3. To assess the competitor probable reaction: Another objective of competitor analysis is to assess the competitor probable reaction to the range of industry changes. If the industry structure is changed then strategy will be changed. 

 

There are mainly two approaches to identify the competitor. These are.......

 1. Narrow concept: Here, a company identifies his competitors who have same strategy, goal, policy, and produce product to satisfy the same target customer.

2. Broad concept: Here, a company identifies his competitors who have principles and substitute product to satisfy the customer need.

There are several approaches to identify the competitor. These are....

1. Firms who ability to overcome the entry barriers: Firms not in the industry but who could overcome the entry barriers is considered as competitor.  For example, firms who are the member of other industry.

2. Firms for whom there is obvious synergy: Firms for whom there is obvious synergy is treated as competitor. For example, joint effort is greater than single effort. 1+1 is greater than 2.

3. Firms who have ability to extent of the corporate strategy: Firms for whom competitor in the industry is an obvious extension of the corporate strategy. That means the firms who increase their business unit and take separate strategy for each unit is treated as competitor. For example, now square is known as square group of industry because of extension of function and for including in different industry. So, it is treated as competitor to another company.

4. Integration of backward and forward linkage: Customer or supplier who may integrate backward and forward is considered as competitor. For example, if the potato producer takes decision to produce potato chips then it is known as forward integration. On the other hand, if the chips company takes decision to produce potato then it is known as backward integration. So, this backward and forward integration increase the competitor.

 

We know that, each competitor’s main target is to capture the market by satisfying their customer need. So, to satisfy their customer need they have to introduce new strategy or change their strategy according to change of strategies by their competitors.

Competitive moves refer to the competitor movement. Companies change their strategies when they see their competitor change strategy. That means, what will be the movement or strategy of a company it totally depends on the movement of its competitor.

 

A competitive move refers to the future situation and the condition in terms of the present condition. For example if one company reduce 1 taka in price then another firm in the industry will reduce 1 taka in price or will take another strategy. This is the competitive moves. There are two types of competitive moves. These are…

They are summarized in below….

1. Offensive moves: It is an aggressive move. In this move it is determined that any how the customers of the other firm are to be dragged to the firm. For this firm can offer discount, sales promotion, after sales service etc. to attract the customers of the other firm. More investment is needed to apply this move. But if the rival firm in the maturity stage, the customer will not switch. In this case extra facility is to be given like-

a. Fewer prices.

b. Quality of the product.

It may be of two type's like-

i. Brute force approach: In this move it is determined that any how the market share is to be enhanced. If it is needed the marketer will offer the product at the price equivalent to the cost of the product. Ultimately the sales volume and the profit will be increased.

ii. Co-operative and non-threatening approach: In this move all the firms run the business cooperatively and each of them consider other's to exist in the market. Each of the firm follows the same strategy.

2. Defensive move: In this move the firm tries to defense own self. That means try to protect from the attack of the other firms and then counter attack. It may be of two types. like-

i. Discipline as a base of defense: In this move the firm follows the strategy followed by the competitor firms. If the firms reduce the price then concern firm also reduces the price.

ii. Denying a base: In this move the firm doesn’t reduce the price despite the competitor firms reduces the price. Because some of the customers are price sensitive and they don’t response to the price reduction. It specially depends on the customer perception.

 

Market signal means providing a signal how the market will behave in future. That means what will be the market behavior in future? That can be forecasted by seeing the initiative of the market. For example, cloud in the sky indicates that there may be rain.

A market signal is any action by a competitor that provides a direct or indirect indication of its intensions, motives, or goals or internal situation. For example, the cow is attracted by anthrax diseases. The person who take the beef then that person will also be attracted by the anthrax. So, it is the signal for the increase of demand of the chicken.

 

There are two types of market signals such as-

1. Truthful indication: In this signal the signal giving firm tell the truth when it give the signal to the other firms. Example- if they plan to reduce the price, they reduce the price.

2. Bluff signal: In this signal the signal giving firm tries to mislead the other competitive firms. They provide information about their future goal and strategy but do anything else. Example- they plan to reduce the price but don't reduce the price.

 

There are five forms of market signals which are described in bellow-

1. Prior announcement: The signal giving firm gives the signal before taking any strategy in advance.

2. Announcement of result after the action: In this form they inform after taking the strategy to the other firms.

3. Discussion: In this signal the high official or any executive disclose the information regarding their future strategy in any seminar, workshop or conference in unconscious mind.

4. The cross parry: Here a company takes the approach according to the approach of his competitor. When one firm initiate to move in one area and competitors response in a different area with one that affect the initiating firm, the situation can be called a cross parry. For example: If a company emphasizes more on low cost production then its competitor may give more emphasize on high quality product.

5. The fighting brand: A form of signal related to cross parry is fighting brand. A firm threatened or potentially threatened by another can introduce a brand that has the affect of punishing or threatening to punish the source of threat. For example: when Savlon introduce cream then its competitor Datol introduce hand wash or spray to compete.

Chapter: Value Chain 

   

 

Customers are buying products for getting maximum value from it in exchange of cost they paid. So each and every organization’s main task is to create value for its customers and convert the input into output.           Value chain refers to a collection of activities that are engaged to design, produce, and market, deliver and support its products. As example, the value chain of a computer depends on

1. Series of activities taken to create value (consequently).

2. How much input, money, investment, needed to create it?

3. Earned margins by selling it.

Those three things display the value chain of this computer. So value chain display

a. total value

b. value activities

c. margin

Basically company’s relative position in the market depends on the analysis of value chain.

In short, Value chain can be defined as a company tool for identifying ways to create more customer value. Value chain is measured by total revenue in the amount of the buyers are willing to pay.

             Margin= Total value – Collective cost of performing the value activities

At last we can say that the effectiveness of any organization depends on its effective value chain. Value chain displays total value and consists of value activities and margin.

 

Industrial or company value system is very much related with industry value chain. Actually each and every department has a value chain and combination of all of them is called value system. It can be shown in below way:

Here supplier, firm, channel, and buyer have their own value chain and value system consist of those value chains.

So, a firm’s value chain is embedded in a larger system of activities that may be termed as value system.

                            Value system = input/output>1

That means, if input is 2tk, then output is to be >2 tk.

At last we can say that value chain refers to series of activities engaged in creating value while value system consists of that value chain.

 

Performing all the activities efficiently and orderly for achieving organizational objective is called value chain. We can get competitive advantage in value chain from what it displays.

Value chain displays …

1. Total value

2. Value activities.

3. Margins.

On the basis of those three things, we can analyze competitor’s performance as well as we can compare our relative position with them. We will get competitive advantage if and only if...

1. Total value is higher

2. Value activities can be conducted with lower cost but higher quality

3. Maximum margin earned. 

If that are not or negative, then we will not get the competitive advantage from value chain.

So to get competitive advantage from value chain all the activities engaged to create value is to be conducted efficiently.

 

Value activities refer to those activities which are responsible for creating value in goods on services. There are two types of value activities –

1. Primary activities: It refers to those types of value activities which are considered as core or main activities of an organization which directly create value for its product. Those ares-

a. Inbound logistics: Activities associated with receiving, storing and disseminating/circulating inputs to the product that means bringing factors of productions to the production unit. Such as material handling, warehousing, inventory control, vehicle scheduling etc.

b. Operations: Transforming inputs into final product. That means it creates form utility of the product. Such as machining, packaging, assembly, equipment maintenance, testing, printing etc.

c. Outbound logistics: Collecting, storing, and physically distributing the product to buyers. That means it distribute the final product from production point to the consumption point. Such as finished goods warehousing, material handling, delivery, vehicle operation, order processing, scheduling etc.

d. Marketing and sales: It is providing a means by which buyers can purchase the product, such as advertising,    promotion, sales force, channel selection and relation, pricing etc.

e. Service:  It is used to enhance or to maintain the value of the product. such as installation, repair, training, part supply, product adjustment etc.

2.  Supportive activities: The activity which support primary activities and indirectly related in creating values is called supportive activities.

a. Procurement: It refers to the function of purchasing inputs used in the firms value chain in inbound logistic, only raw materials is handled while often inputs like machine, ancillary product etc are handled by procurement department.

b. Technology development: It improves the product and the process. It uses instead of R&D, because R&D uses in a narrow sense. Such as documents prepare, order entry system, media research, process equipment design, servicing procedure etc.

c. Human resource management: It also occurs in all departments and consists of activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel.

d. Firm infrastructure: It consists of a number of activities including general management, planning, financing, accounting, legal, govt. affairs, and quality management. It usually supports the entire chain not individual activities. 

 

Within each category of primary and support activities, there are three activity types that play a different role in competitive advantage:

1. Direct: Activities directly involved in creating value for the buyer (such as assembly, parts machining, sales forces, operations, advertising, product design, recruiting, etc.

2. Indirect: Activities that make it possible to perform direct activities on a continuing basis (such as maintenance, scheduling, operation of facilities, sales force, administration, vendor records keeping, etc)

3. Quality assurance: Activities that ensure the quality of other activities. Such as monitoring, inspection, testing, reviewing, checking, adjusting, and reworking, etc.

 

There are four dimensions in competitive scope.

1. Segment scope: If a particular product can match the value chain of targeted market segment, then that product will be sold more in the market. In this way company can get competitive advantage and vice-versa.

2. Vertical scope: Some time company cannot conduct all the activities. So it takes help of business outsourcing .At that time company needs to analyze which way is best for it. The ways are-

          a. Conducting activities by own

          b. Conducting activities by outsourcing.

Where advantage is greater, there company will get more competitive advantage.

3. Geographic scope: In which geographic areas, company can  get more competitive advantage with less competition, that means are to be selected to market the products. In Saudi Arab hot drinks marketer may not get competitive advantage as its weather is very hot.

4. Industry scope: if there is related industry such as supplementary, complementary industry is related with main industry then related industry can achieve the strength of main industry. As an example- If harvesting is not good, supply will be hampered & production will be reduced, so value chain will not get competitive advantage.

 

The strategies which ensure the maximum co-relation and integration should be followed. If we maintain the proper linkage within value chain then it will ensure the market capture and loyalty. Linkage can be defined as relationships between the ways one value activity is performed and the cost or performance of another. Integration can be done in two ways-      

             a. Within  value chain

             b. Out of the value chain.

It offers two types benefits.

             a. Optimization

             b. Proper co-ordination

 

1. Maximum co-ordination: With the help of linkage, maximum co-ordination can be ensured. Which linkage is very effective, that can be chosen through knowing linkage.

2. Maximum integration: Actually direct activities depend on indirect activities. The cost or performance of direct activity is improved by greater efforts in indirect activities which is possible through linkage.

3. Proper co-ordination in company production system: if inspection of firms inside activities can be increased then it will reduce the cost in the field. And it is possible with the help of integration.

4. Quality assurance: When linkage can be ensured then the quality assurance of total quality management can be ensured or maintained. 

 

Vertical linkage: linkage between supplier and channel member is called vertical linkage. That means, there should have been a proper integration and co-ordination between input and operation as well as operation and output. With the help of vertical linkage, right time production and right time distribution is possible. So, vertical linkage can be defined as the linkage which not only within a firm’s value chain but between the firm’s chain and the value chains of suppliers and channels. There are two types of vertical linkage: 

1. Supplier linkage: Here the company must have a linkage with the supplier to ensure right time production. If supplier does not supply regularly, then right time production will not be possible.

2. Channel linkage: Here company must have a linkage with the channel members, proper integration, co ordination, must be built up with the channel member to sell the company’s product to the customer.

 

 

Buyer may be ultimate consumer, reseller, or industrial customer. Each customer has their own value chain as each manufacturer has their own value chain. Company should design their value chain in accordance with buyer value chain, because, if producer value chain is consistent with the buyer value chain then the buyer will buy the product otherwise not.

A consumer value chain represents the sequence of activities performed by a household and its various members in which products or services fit. Example: Two types of body spray ‘BSE’ and ‘CBS’ offered to the market. BSE has lemon flavor while CBS has chocolate flavor. The consumer will buy that type of body spray between them which body spray is consistent with buyer value chain.

So companies need to analyze the buyer value chain for designing their own value.

		Chapter: Value Chain and Cost analysis

 

All types of activity of a business enterprise are occurred in value chain.  Every cost according to head is found in income statement. Income statement is the financial reflection of value chain.  Value chain is business enterprise anatomy. To know the business at first one has to know the value chain system of that business. It is a company tool or device for identifying ways to create more customers value and it is a collection of interdependent activities. Value chain identifies some strategically relevant activities that create value and cost in a specific business. The behavior of a firm’s cost and its relative cost position originated from the value activities. Cost analysis examines cost within these activities and not the cost of the firm as a whole.

 

There are two steps-

1. Define the value chain & value activity

2. Assign operating cost & assets to value activities.

1. Define the value chain & value activity:  The starting point for cost analysis is to define a firm’s value chain. Because each step in value chain activity lead to some costs but the cost of each steps will not be equal.

2. Assigning operating costs and assets cost to value activity: After identifying the value chain, a firm must assign operating cost and assets to value activities. Operating cost should be assigned to the activities in which they are incurred. Assets should be assigned to the activities that employ, control or most influence their use. Assets cost incurred after use of fixed assets and depreciation.

For purposes of cost analysis, three principles are important. These are discussed in bellow-

1. The size and growth of cost represented by the activity: Activities should be separated for cost analysis if they represent a significant or rapidly growing percentage of operating costs and assets. While most firms’ can easily identify the large components of their cost, they frequently overlook smaller but growing value activities that can eventually change their cost structure.

 

2. The cost behavior of the activity: Activity must also be separated if they have different cost drivers. Activities with similar cost drivers can be safely grouped together.

3. Competitor differences in performing the activity: A final test for separating value activities is the behavior of competitors. Significant activities should be treated separately when a competitor performs them in a different way.  

 

A firm’s cost position can be known from the cost behavior of its value activities. Cost behavior depends on a number of structural factors which is known as cost driver.

 

Cost drivers are the structural causes of the cost of an activity and can be more or less under a firm’s control. Ten major cost drivers determine the cost behavior of value activities. These are-

1. Economies or diseconomies of scale: Scale means input output relationship. If the rate of return is greater than the input then it will become economies of scale or otherwise diseconomies of scale.

2. Learning & spillover: The cost of a value activity can decline over time due to learning that increases its efficiency. Learning can spill over from one firm in an industry to another. Where spillover of learning among firms is high in a value activity, the rate of learning may be more from total industry learning than from the learning of one firm.

3. Pattern of capacity utilization: Where a value activity has substantial fixed cost associated with it, the cost of an activity will be affected by capacity utilization. It is partly determined by environmental conditions and competitor investment behavior.

4. Linkages: It creates the opportunity to lower the total cost of the linked activities. It can be achieved through joint optimization and coordination.

5. Interrelationships: Interrelationship with other business units within a firm affects cost. The most important form of interrelationships is when a value activity can be shared with a sister unit. It reduces cost. Another form of interrelationship is sharing know-how between separate activities.

6. Integration: The level of integration in a value activity may influence its cost. Whether integration raises, lowers, or has no effect on cost depends on the particular value activity and purchased input involved.

7. Timing: The cost of value activity often reflects timing. Sometime a firm may gain first- mover advantages from being among the first to take a particular action. Late movers can enjoy benefits, such as purchasing the latest equipment or avoiding high product development cost. Timing’s role in cost position may depend more on timing with respect to the business cycle or market condition.

8. Discretionary policies independent of other drivers: The cost of the value activity is always affected by policy choices a firm makes. Some of the policy choices that tend to have the greatest impact on cost include-

a. product configuration, performance, and features

b. mix and variety of products offered

c. level of service provided

d. delivery time

e. buyers served

f. channels employed

9. Location: The geographic location of a value activity can affect its cost. Locations differ for cost of labor, management, scientific personnel, raw materials, energy, and other factors.

10. Institutional factors: Institutional factors including government regulation, tax holidays, tariffs, levies and other financial incentives, unionization, and local content rules constitute the final major cost drivers. Favorable Institutional factors can lower costs just as unfavorable ones can raise them.

 

Cost dynamics means how a firm’s absolute and relative cost of value activities will change over time independent of its strategy. An analysis of cost dynamics enables a firm to forecast how the cost drivers of value activities may change and which value activities will increase or decrease in absolute or relative cost importance.

Cost dynamics occur because of the interplay of cost drivers over time. The most common sources of cost dynamics include-

1. Industry real growth: Growth of an industry as a whole often has a number of effects on cost. Growth can flow through to purchase inputs. In some industries, industry growth forces up the cost of purchased inputs by declining the supply/demand balance, while in others it lowers the cost of inputs by making the suppliers more efficient. Industry growth can also create possibilities for scale economies by making the introduction of new technologies available in value activities.

2. Differential scale sensitivity: Real growth or decline in the sales of firms can dramatically change the absolute and relative costs of value activities if activities have differing scale sensitivity.

3. Different learning rates: The different cost of different value activities will change if learning occurs in them at different rates. Learning reduces the relative cost of those value activities in which it proceeds most rapidly.

4. Differential technological changes: Technological changes that proceed at different rates can clearly affect the relative cost of different value activities and their cost drivers.

5. Relative inflation of costs: The rate of inflation in key cost elements in value activities often differs and this can significantly shift their relative cost. Differential inflation rates can quickly turn an insignificant value activity into one of critical strategic importance, or can convert a modest cost items within an activity into the dominant one.

6. Aging: An aging capital base or workforce can shift the relative cost of value activities. Older machinery requires more maintenance and insurance, for example, an older workforce typically has higher salary and benefit costs.

7. Market adjustment: The operation of market forces often works to counteract high or low purchased input costs and to eliminate or reduce cost differentials based on favorable purchasing by individual firms.   

		Chapter: Cost advantage

A firm has a cost advantage if its cost of performing all value activity is lower than competitor costs. The strategic value of cost advantage depends on its sustainability. Sustainability will be present if the sources of a firm’s cost advantage are difficult for competitors to replicate or imitate. A firms relative cost position is a function of-

a. The composition of its value chain vs. competitors

b. The relative position in relation to the cost drivers of each activity.

 

There are three steps-

1. Determining the relative cost of competitors

2. Gaining the cost advantage

3. Sustainability of cost advantage

Descriptions about these are as follows-

1. Determining the relative cost of competitors: The value chain is the basic chain for determining the competitor cost. It follows some step-

a. To identify competitors value chain & how activities are performed by them.

b. To estimate the cost of each value activity of the customers value chain.

c. To compare own cost with the competitors & find out the differences.

d. Make decision how to reduce cost in case of access of companies own cost.

2. Gaining cost advantage: There are two major ways to gain cost advantage-

a. Control cost driver: a firm can gain advantage with respect to the cost drivers of value activities representing a significant proportion of total cost. The cost drivers can be controlled by under mentioned ways-

i. Controlling scale: Gain the appropriate type of scale and set policies for to reinforce the scale economies where the firm is favored.

ii. Controlling learning: Manage with learning curve, keeping learning proprietary, and learning from competitors.

iii. Controlling the effect of capacity utilization: Can be done by two ways, a. level the throughput, b. reduce the penalty of throughput fluctuations.

iv. Controlling linkage: Exploit cost linkage within the value chain, work with supplier and channels to exploit vertical linkages.

v. Controlling interrelationship: Share appropriate activities, transfer know-how in managing similar activities.

vi. Controlling integration: Examine systematically possibilities for integration and de-integration.

vii. Controlling timing: Exploit first mover or late mover advantages and time purchases in business cycle

viii. Controlling location: Optimizing location.

ix. Controlling institutional factors: Do not take institutional factors as a given.

x. Controlling discretionary polices: Modify expensive policies, invest in technology to skew cost drivers in the firm’s favor.

b. Reconfigure the value chain: A firm can adopt a different and more efficient way to design, produce, distribute, or market the product. In fact successful cost leaders can also gain cost advantage from the following ways-

 

Ø Arrange new raw material

Ø New channel of distribution

Ø Backward or forward linkage

Ø Differences in automation

Ø Direct sales instead of indirect sales

Ø New advertising media

Ø Shifting the location of facilities

Ø A different production process

3. Sustainability of cost advantage: Cost advantage is sustainable if there are entry or mobility barriers that prevent competitor from imitating its sources. Sustainability varies for different cost drivers and from one industry to another. Some drivers are more sustainable than others. These are-

i. Scale: it is a key entry/ mobility barrier and the cost of replicating scale is often high.

ii. Interrelationship: Interrelationship with sister business units can force a competitor to diversify in order to match a cost advantage. If there are entry barriers into the related industries, sustainability can be high.

iii. Linkages: Linkages are often difficult for a firm to detect and require coordination across organizational lines or with independent suppliers and channels.

iv. Proprietary learning: Learning is difficult to achieve in practice; it can also be hard for competitors to catch up if learning can be kept proprietary.

v. Policy choices to create proprietary product or process technology: Replicating product innovations or new production processes often poses great difficulties for competitors if innovations are protected by patents or secrecy. Process innovations are more sustainable than product innovations because secrecy is easier to maintain.

Chapter: Differentiation

Every firm wants to distinguish itself from its competitors. For this, they take the help of differentiation; one of the two types of competitive advantage a firm may possess.

Differentiation is the process of providing something unique that is valuable to the buyers beyond simply offering a lower price. Differentiation can arise anywhere in firm’s value chain.

Differentiation offers several advantages, such as—

1. Charge premium price: Customers always agree to pay premium price for differentiated products or services. That means it helps the firms to get the additional payment of price through by lowering buyer cost and increasing buyer performance so that buyers will be willing to pay the price.

2. Sell more: customers always prefer differentiated products or services even though the price is high. That means it allows a firm to sell more of its product at a given price.

3. Gain better loyalties: Buyers tend to be loyal to such firm that offers them most differentiated products or services. So, it is a way to gain better buyer loyalties.

From the overall discussion we can say that, a firm can differentiate itself by offering something unique rather than that of its competitors and which is valuable to the buyers from different perspectives.

 

 

Differentiation is the process of providing something unique that is valuable to the buyers beyond simply offering a lower price. Every firm wants to distinguish itself from its competitors. For this, they take the help of differentiation. Actually differentiation arises from the firm’s value chain and every value activity is a potential source of uniqueness.

1. For primary activities: We know that there are five particular primary activities in a firm’s value chain. All these activities can be a source of a firm’s uniqueness. These are as follows----

a. Inbound logistics: Uniqueness may occur from the handling of inputs that minimize damages, timeliness of supply of the manufacturing process.

b. Operations: A firm can get the advantages of differentiation by performing its operations uniquely. Here uniqueness may arises from the tight conformance to specifications, attractive product appearance, low defect rates, short times to manufacture

c. Outbound logistics: These tasks are related with the delivery process. In this case uniqueness may occur through rapid & timely delivery, accurate and responsive order processing

d. Marketing and sales: These tasks are related with the distribution and selling of products and services. Here a firm can gain uniqueness by maintaining higher advertising level and quality, high sales forces coverage 7 qualities, personal relationships with channel members or buyers, most extensive promotion/credit to buyer or channels.

e. Service:  In this case a firm can gain uniqueness through Rapid installation, high service quality, wide service coverage, extensive buyer training. For example- Grameen phone has differentiated itself from others because of its high service quality and wide service coverage through its customer care centers.

2. For the supportive activities: Supportive activities are very much important in a firm’s value chain. Without the help of those it is not possible to run primary activities. A firm can get the advantages of differentiation by performing its supportive activities more uniquely. These are as follows……

a. Firm’s infrastructure: In this case a firm can gain uniqueness through the top management support in selling facilities that enhance a firm’s image, superior management information system (MIS).

b. Human resource management:  workforces are the most important resources for a firm. A firm can use its workforces more uniquely through the superior training of personnel (inbound logistics activities), stable workforce policies, quality of work life programs, programs to attract the best scientist and engineers (operations activities), sales incentives to retain best salespersons, recruiting better qualified sales and service personnel (marketing and sales activities), extensive training of service technicians (service activities).

c. Technological development: Technology plays a vital role in a firm’s value chian. In this case a firm can differentiate itself from its competitors through the Superior material handling & sorting technology, quality assurance equipment (inbound logistics activities), unique product features, rapid model introduction, unique production process, automated inspection procedures (operations activities), unique vehicle scheduling, software (outbound logistics), application engineering support, superior media research (marketing and sales activities), advanced servicing techniques (service activities).

d. Procurement: In this case a firm can gain  uniqueness through the use of Most reliable transportation for inbound delivery (inbound logistics activities), higher quality raw materials & components (operations activities), best located warehouse, transportation suppliers that minimize damages (outbound logistics), most desirable media placements, product positioning and image research (marketing and sales activities), higher quality replacement parts (service activities).

From the overall discussion we can say that differentiation originates from the specific activities a firm performs.

 

Uniqueness doesn’t lead to differentiation unless it is valuable to the buyer. Like cost behavior uniqueness is also determined by several factors or drivers. Actually drivers are the forces that influence anything. Without the uniqueness of drives it is difficult for a firm to create differentiation. The major uniqueness drivers are as follows…………

1. Policy choices: A firm choices policies for its different activities regarding what to perform and how to perform. Some typical policies that lead to uniqueness are----

a.     Product features and performance offered

b.    Service provided (e.g. credit, delivery, or repair)

c.      Intensity of an activity adopted (e.g. rate of advertising spending)

d.    Content of an activity (e.g. the information provided in order processing)

e.      Technology employed in performing an activity (e.g. effective machine tools, computerization of order processing)

f.      Quality of inputs procured for an activity

g.     Skills and experience level of personnel employed in an activity and training provided

h.    Information employed to control an activity (e.g. temperature, pressure, and variables used to control a chemical reaction)

2. Linkage: Linkages can lead to uniqueness if the way one activity is performed affects the performance of other. To meet buyer needs a firm need to involve in some coordinated linked activities such as:

i.       Linkage within the value chain

j.       Suppliers linkage

k.    Channels linkage

Buyer should create such supplier linkage where the supplier would only supply to the firm. Again linkages within channels can lead to uniqueness in the following ways:

  a. Training channels in selling and other business practices

  b. Joint selling efforts with channels

  c. Investment in personnel, facilities, and performance of additional activities.

3. Timing: Uniqueness may result from the timing of the operations of firms. A firm may be a first mover or late mover. For example- Citicell enjoyed a monopoly situation in the mobile market of Bangladesh because it was the first mover.

4. Location: Selecting the proper location can be a source of uniqueness. For example- RDA market of Shaheb Bazar is enjoying more benefit than that of New Market because of the choice of location.

5. Interrelationship: The uniqueness of a value activity may arise from sharing it with sister business unit. For example- the dental department of a hospital may use the instruments and expertise of the department of surgery. That means the higher the level of interrelationship the lower the level of bottleneck.

6. Learning: The uniqueness of an activity can be the result of learning about how to perform it better. The learning should be kept proprietary. It should not be flashed.

7. Intuitional factors: It sometimes plays a role in allowing a firm to be unique. Similarly, a good relationship with its union may allow a firm to establish unique job definition for employee.  

 

A firm differentiate itself from other its competitors to capture more loyal customer and to attract new customers. Uniqueness doesn’t lead to differentiation unless it is valuable to the buyer. Before knowing how buyer value can be created, we should know what is value? 

Value: Value is the difference between what customer give for the product and what he gain from the product.

                                           Buyer value = benefit / cost

                                           Or, v = b/c

Benefits: combination of functional and emotional benefits.

1. Functional benefits: operational activities of the product or the product utility. For example- the functional benefit of mobile is the capacity to talk.

2. Emotional benefit: it is the emotional attachment of the buyer to the particular product or service. Actually customers do not buy product or service rather they buy the brand. For example- a customer may be best satisfied with mobile of Nokia brand, another may with the Sony Ericson brand.

 

Value is created for the buyer when a firm creates competitive advantage for its buyer by lowering its buyer’s cost or raises its buyer performance. So, that buyer value may create through two mechanisms such as…

1. By lowering buyer cost: There are frequently ways to lower buyer cost if a firm has a sophisticated understanding if how buyers use its product and how it varies marketing, delivering and other activities affect buyer cost. A firm can lower its buyer cost in a number of ways…

a. Lower delivery installation or financing cost.

b. Lower direct cost of the product.

c. Lower risk of using cost in other value activities unconnected with the physical product.

2. By raising buyer performance: It depends on to measure what performance a buyer expect from a product. It is not possible to identify the consumer need without knowing consumer value chain. For example, a truck sold to a buyer who is a consumer goods company that uses it to carry goods to retail stores. If the retail stores desire frequently delivery the consumer goods company will be very interested in a truck with carrying capacity to frequently deliver at a reasonable cost. Raising performance of industrial, commercial or institutional buyers can also be based on helping them meet their noneconomic goals. Such as status, image, prestige. It is possible through below ways…

a. Raise benefit not cost.

b. Reduce that cost.

c. Both that means the rate of benefit will increase than the rate of cost increase.

 

Buyer purchase criteria means the specific attributes of a firm that create actual or perceived value for the buyers. It can be divided into two types.

1. Use criteria: use criteria are specific measures of what creates buyer value. Purchase criteria that originate from the way in which a supplier affects actual buyer value through lowering buyer cost or raising buyer performance. Use criteria may include such factors are product quality, product features, delivering time, applications, engineering support etc.

2. Signaling criteria: signaling criteria are measure of how buyers perceived the presence of value. Signaling criteria reflect the buyer’s perception of the firm’s ability to meet its use criteria. It may help a particular to be considered and or may play an important role in the buyers final purchase decision. It might include factors such as advertising, the attractiveness of facilities, and reputation.

 

A firm can enhance its differentiation in two basic ways…

1. Value activity efficiently and effectively: Differentiation for a firm is possible through providing unique design in value system. Becoming more unique in its value activities requires that a firm manipulate the drivers of unique such as—policy choice, linkages, timing, location, interrelationship, learning, integration scale etc.

2. Reconfigure the value activity: It may reconfigure its value chain in some way that enhances its uniqueness. It depends on the company’s situation. With the change of company situation and the customer demand the company should reconfigure the value chain activities to adopt themselves with the changing situation.

Differentiation is very much essential for a firm to survive and to complete in the competitive market because customers are very much dynamic here. A number of approaches characterized successful differentiation. These are as follow.

1. Enhance the sources of uniqueness: A firm should not depend on one or two sources always open the alternative sources. A firm can often increase its overall differentiation by exploiting sources of uniqueness in additional value activities. For example, Mahindra tractor which is combined uniqueness in product durability, parts availabilities and its dealer network.

2. Make the cost advantage in differentiation: A firm should create differentiation to achieve cost advantage. Take the opportunity of all sources of differentiation that are not costly. Many activities can be made more unique at little extra cost. Minimize the cost of differentiation by controlling cost drivers, particularly the cost of signaling. A firm can minimize the cost of differentiation by recognizing the impact of cost drivers.

3. Change the rules of uniqueness: A firm may be able to increase its uniqueness or the perceived value of that uniqueness if it can offer the purchasing process in a way that elevates (raise) the role of decision makers who value mare the firm’s particular forms of uniqueness. It may be possible in the below way.

Ø Developing a new type of salesman.

Ø Involving technical people in the sale.

Ø Changing advertising media and content.

Ø Changing selling materials.

Ø Educating the buyer.

4. Reconfigure the value chain: The discovering an entirely new value chain can unlock possibilities for differentiation. It depends on the company’s situation. It can be done in the below ways.

Ø A new distributor channel or selling approach.

Ø Forward integration to take over buyer functions or eliminate the channels.

Ø Backward integration to control mare determinants of product quality.

Ø Adoption of an entirely new process technology.