MBALN707 - Topic+2 - Overview

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Topic 2 - Overview

Differentiation & Competitive Advantage

Topic’s Learning Objectives

1. Understand the industry you are planning to enter.

2. Determine whether the new business proposition adds value to the


targeted market segments, whether the potential customers will
benefit from this.

3. Assess to which extent the new business innovates or


commoditizes.

4. Evaluate in depth the new business potential to succeed:

a. Assess the critical survival factors.

b. Determine the appropriate business model to achieve the


business objectives and examine the feasibility of the new
business.

Introduction

Can the new businesses compete and win?


Every business aiming to secure its survival and development must offer value to
its customers. Value means solving problems or satisfying existing needs and
desires. However, this is expected from any business and does not create any
specific reason to be chosen among the competitors, i.e. it does not create
competitive differentiation. Competitive differentiation or advantage will be
achieved when the business can offer greater value for money to its customers
than its competitors do. The market must have ‘enough room’ for the new
business if it is to survive and grow.

Always compete to win!


Main Analysis

Understand well the industry in which the new business is


planning to enter.

Please, read the following interesting article that will give you valuable
guidance about exploring the industry.

“Know Your Industry Before You Start Your Business”, by Tim Berry

You need to explain the type of business you’re in. You’ll be expected to explain
the general state of your industry and the nature of the business, especially if
your plan is going outside your company to banks or investors.

Whether you’re a service business, manufacturer, retailer, or some other type of


business, you should do an Industry Analysis, describing:

 Industry Participants.
 Distribution Patterns.
 Competition and Buying Patterns.

Industry analysis
Everything in your industry that happens outside of your business will affect your
company. The more you know about your industry the more advantage and
protection you will have.

A complete business plan discusses general industry economics, participants,


distribution patterns, factors in the competition, and whatever else describes the
nature of this business to outsiders.

The Internet has had an enormous impact on the state of business information.
Finding information isn’t really the problem any more, after the information
explosion and the huge growth in the Internet beginning in the 1990s and
continuing in the 21st Century. Even 10 or 15 years ago, dealing with information
was more a problem of sorting through it all than of finding raw data. That
generality is more true every day. There are Web sites for business analysis,
financial statistics, demographics, trade associations, and just about everything
you’ll need for a complete business plan.

Industry participants
You should know who else sells in your market. You can’t easily describe a type
of business without describing the nature of the participants. There is a huge
difference, for example, between an industry like broadband television services,
in which there are only a few huge companies in any one country, and one like
dry cleaning, in which there are tens of thousands of smaller participants.

This can make a big difference to a business and a business plan. The
restaurant industry, for example, is what we call “pulverized,” which, like the dry
cleaning industry, is made up of many small participants. The fast food business,
on the other hand, is composed of a few national brands participating in
thousands of branded outlets, many of them franchised.

Economists talk of consolidation in an industry as a time when many small


participants tend to disappear and a few large players emerge. In accounting, for
example, there are a few large international firms whose names are well known
and tens of thousands of smaller firms. The automobile business is composed of
a few national brands participating in thousands of branded dealerships. In
computer manufacturing, for example, there are a few large international firms
whose names are well known, and thousands of smaller firms.

Distribution patterns

Products and services can follow many paths between suppliers and users.
Explain how distribution works in your industry. Is this an industry in which
retailers are supported by regional distributors, as is the case for computer
products, magazines, or auto parts? Does your industry depend on direct sales
to large industrial customers? Do manufacturers support their own direct sales
forces, or do they work with product representatives?

Some products are almost always sold through retail stores to consumers, and
sometimes these are distributed by distribution companies that buy from
manufacturers. In other cases, the products are sold directly from manufacturers
to stores. Some products are sold directly from the manufacturer to the final
consumer through mail campaigns, national advertising, or other promotional
means.

In many product categories there are several alternatives, and distribution


choices are strategic. Encyclopedias and vacuum cleaners are traditionally sold
door-to-door, but are also sold in stores and direct from manufacturer to
consumer through radio and television ads.

Many products are distributed through direct business-to-business sales, and in


long-term contracts such as the ones between car manufacturers and their
suppliers of parts, materials, and components. In some industries companies use
representatives, agents, or commissioned salespeople.

Technology can change the patterns of distribution in an industry or product


category. The Internet, for example, changed options for software distribution,
books, music, and other products. Cable communication is changing the options
for distributing video products and video games.

Distribution patterns may not be as critical to most service companies, because


distribution is normally about physical distribution of specific physical products
such as a restaurant, graphic artist, professional services practice, or architect.

For a few services, distribution may still be relevant. A phone service or cable
provider, or an Internet provider, might describe distribution related to physical
infrastructure. Some publishers may prefer to treat their business as a service
rather than a manufacturing company, and in that case distribution may also be
relevant.

Competition and buying patterns

It is essential to understand the nature of competition in your market. This is still


in the general area of describing the industry, or type of business. Explain the
general nature of competition in this business, and how the customers seem to
choose one provider over another. What are the keys to success? What buying
factors make the most difference–Price? Product features? Service? Support?
Training? Software? Delivery dates? Are brand names important?

In the computer business, for example, competition might depend on reputation


and trends in one part of the market, and on channels of distribution and
advertising in another. In many business-to-business industries, the nature of
competition depends on direct selling, because channels are impractical. Price is
vital in products competing with each other on retail shelves, but delivery and
reliability might be much more important for materials used by manufacturers in
volume, for which a shortage can affect an entire production line.

In the restaurant business, for example, competition might depend on reputation


and trends in one part of the market, and on location and parking in another.

In many professional service practices the nature of competition depends on


word of mouth, because advertising is not completely accepted. Is there price
competition between accountants, doctors, and lawyers? How do people choose
travel agencies or florists for weddings? Why does someone hire one landscape
architect over another? Why choose Starbucks, a national brand, over the local
coffee house? All of this is the nature of competition.

Main competitors

Do a very complete analysis of your main competitors. List the main competitors.
What are the strengths and weaknesses of each? Consider their products,
pricing, reputation, management, financial position, channels of distribution,
brand awareness, business development, technology, or other factors that you
feel are important. In what segments of the market do they operate? What seems
to be their strategy? How much do they impact your products, and what threats
and opportunities do they represent?

Source: http://articles.bplans.com/starting-a-business/know-your-industry-before-
you-start-your-business/72

At this point, please access YouTube and watch this very interesting video
on assessing business competitors.

http://www.youtube.com/watch?feature=player_detailpage&v=T7PrhuCGHy0
Determine whether the new business proposition adds value to
the targeted market segments, whether the potential customers
will benefit from.

A value proposition is a promise of value to be delivered and a belief from the


customer that value will be experienced. A value proposition can apply to an
entire organization, or parts thereof, or customer accounts, or products or
services.

Creating a value proposition is a part of business strategy. Kaplan and Norton


say "Strategy is based on a differentiated customer value proposition. Satisfying
customers is the source of sustainable value creation."[1]

Developing a value proposition is based on a review and analysis of


the benefits, costs and value that an organization can deliver to its customers,
prospective customers, and other constituent groups within and outside the
organization.

Source: Neil Rackham, John De Vincentis. Rethinking the Sales Force;


Redefining Selling to Create and Capture Customer Value, McGraw Hill,
1999. ISBN 0-07-134253-2

Does the entrepreneur know who customers the


business will serve are?

Will these customers choose a new business


among its competitors for special reasons?

What are the benefits they will gain?

What is the total cost for the customers?


Customers do not just pay money. They risk,
they feel anxiety, they spend time for research
and travelling, etc.

Customer’s decision making process judges the


cost vs benefits and reaches to a choice that
might be your business or a competitor’s one.
And no one else blames for this other than the
entrepreneur!
Assess to which extent the new business innovates or
commoditizes.

Let’s take a look what innovation is.


Innovation is the process of translating an idea or invention into
a good or service that creates value or for which customers will pay.

To be called an innovation, an idea must be replicable at an economical cost and


must satisfy a specific need. Innovation involves deliberate application
of information, imagination and initiative in deriving greater or different values
from resources, and includes all processes by which new ideas are generated
and converted into useful products. In business, innovation often results when
ideas are applied by the company in order to further satisfy
the needs and expectations of the customers. In a social context, innovation
helps create new methods for alliance creation, joint venturing, flexible
work hours, and creation of buyers' purchasing power. Innovations are divided
into two broad categories:

(1) Evolutionary innovations (continuous or dynamic evolutionary innovation) that


are brought about by many incremental advances in technology or processes
and
(2) revolutionary innovations (also called discontinuous innovations) which are
often disruptive and new.

Innovation is synonymous with risk-taking and organizations that create


revolutionary products or technologies take on the greatest risk because they
create new markets.

Imitators take less risk because they will start with an innovator's product and
take a more effective approach. Examples are IBM with its PC against Apple
Computer, Compaq with its cheaper PC's against IBM, and Dell with its still-
cheaper clones against Compaq.

http://www.businessdictionary.com/definition/innovation.html

At this point, please read the following innovating article by Kjell


Nordstrom

“The World Of Karaoke Capitalism”

In the Karaoke world, expressing your individuality and being different, lies at the
heart of the modern enterprise and modern life. We are all individuals now.

Individualism means that more and more people throughout the world can shape
their lives. Choice rules. Those with cash or competence have the freedom to
know, go, do, and be whoever they want to be.

But, Kjell Nordstrom view is that, whilst the karaoke reality is a cosmopolitan club
with endless individual choice, the trouble for business is that it is also home to
institutionalized imitation.

Copycats abound. Business schools, benchmarking and best practice have


transformed the entire world of commerce into a super-group of karaoke copying
companies. And imitating someone else will never get you to the top - merely to
the middle.

Forget about appealing to the average. Success is a question of exploring the


extremes.

Innovation Inc: Imitate And You Will Die; Innovate And You May Succeed:

"The 'surplus society' has a surplus of similar companies, employing similar


people, with similar educational backgrounds, working in similar jobs, coming up
with similar ideas, producing similar things, with similar prices and similar
quality."

The profusion of markets, surplus supply, continuous commoditization plus


inexpensive information has created perfect competition.

So, imitation can only mean parity at best and, in the survival of the fittest, parity
is not good enough. Imitating someone else will never get you to the top - merely
to the middle.

So, in a world of abnormality, deviance is good. Organizations which maximize


competence are organized in innovative ways to do things - everything -
differently. Find out how Kjell thinks the old rules of how to 'encourage creativity'
will no longer work and what companies need to do now to unleash the power of
innovation that is critical to success and survival in the new world.

Think Theory 1
Innovate

The entrepreneur has to make strategic options that range


from absolute innovation to absolute imitation. What are
the most realistic strategic options an entrepreneur can
apply in a high competitive environment during an or
economic crisis? Imitate
(Take a pen and write down your answer. As soon as you
Evaluate
finish thinking the new
and writing, business
check at thepotential to topic
end of the succeed:

a.overview for critical


Assess the feedback)survival factors.
Look at the following table that presents “The eleven Critical (or Key)
Success Factors” which are used by several authors with similar meaning.
This table was applied in a textile business and can be applied in any
business during its planning, implementation and evaluation stage.

“The eleven Critical (or Key) Success Factors”


1. Management – the extent to which managers use appropriately both
human and material resources available in the firm in order to satisfy
clients expectations. Two more elementary concerns are related to this
C(K)SF:

a. Experience – the extent to which managers have been working in


the textile industry.

b. Knowledge – the extent to which managers know clients


expectations, know the available resources in the firm and know the
state-of-the-art in the textile technology and how far the firm is from
it.

2. Sales Level – in the sense that the firm has a constant sales level in the
Brazilian market, doesn’t experience return of products and is capable to
export.

3. Reputation – in the sense that the firm has a good market image, and is
considered serious by its clients and trustworthy by its suppliers.

4. Costs – the extent to which production costs are known and managed
improving productivity and keeping operational stock as small as possible.

5. Dynamism – the extent to which company reacts to changes in the


external environment. Three more elementary concerns are related to this
C(K)SF:

a. Growth Rate – the extent to which the firm is, at least, following
market’s expansion.

b. Agility – in the sense that firm’s managers are flexible when


negotiating with clients and allow staff members to act in the same
way when answering to clients’ requests.

c. Equipment flexibility – the extent to which firm’s equipment are


flexible enabling firm to adjust quickly to fashion tendencies.

6. Price – the extent to which firm’s prices are competitive relatively to the
market segment in which firm is competing.
7. Differentiation – in the sense that the products of the firm are produced
according to the latest fashion tendencies and are recognized as beautiful
by customers.

8. Quality – the extent to which the firm can maintain good quality level from
the customer viewpoint. Two more elementary concerns are related to this
C(K)SF:

a. Product’s Quality – the extent to which customers are satisfied with


the final touch, the conformity related to the standards required,
and the package of the products.

b. Warranty – the extent to which clients are satisfied with the after-
selling service.

9. Delivery Service – in the sense that the firm assures deliveries are made
on the right dates and on the right quantities or, in case of eventual
delays, clients are notified.

10. Distribution System – in the sense that the firm is competing in all potential
markets and salesmen are capable and satisfied. Three more elementary
concerns are related to this C(K)SF:

a. Area – the extent to which the firm competes in all potential


markets.

b. Salesman satisfaction – the extent to which salesmen are satisfied


with financial aspects, company’s products and negotiation power.

c. Salesman capability – the extent to which the firm is able to hire


good salesmen.

11. Information – the extent to which the company can obtain relevant
information about the market.

After the analysis of the above 11 CSFs within the business the following
grid “The Competitive Strength Grid” can be applied to determine the
competitive level of the business.
Source: MAPPING CRITICAL FACTORS FOR FIRM SUSTAINABLE
SURVIVAL:

A Case-study in the Brazilian Textile Industry,Carlos A. Bana e Costa


Émerson C. Corrêa, Leonardo Ensslin, Jean-Claude Vansnick

b. Determine the appropriate business model to achieve the business


objectives and examine the feasibility of the new business.

First, decide the business model will be applied, how the business will generate
sales profitably. There various models to choose from. The simplest model
involves creating a product and selling it directly to customers. Other models
involve selling wholesale to retailers, selling through distributors, licensing
products to other companies, selling online, selling through auctions, and
countless other alternatives. No one-size-fits-all solution exists. In fact, many
companies use some combination of business models to arrive at a unique
model.

After choosing the right business model for a business idea, a Business
Feasibility Study is very important to be conducted because a business feasibility
study supports the decision-making process as to whether the Business Concept
is in fact viable.

According to research results, it is estimated that only one in fifty business ideas
are actually commercially viable. Therefore a Business Feasibility Study is an
effective way to safeguard against wastage of further investment or resources
(Gofton 1997; Bickerdyke et al. 2000). If a project is seen to be feasible from the
results of the study, the next logical step is to proceed with the full Business Plan.
The research and information uncovered in the feasibility study will support the
business planning stage and reduce the research time. Hence, the cost of the
Business Plan will also be reduced. A thorough viability analysis provides an
abundance of information that is also necessary for the Business Plan. For
example, a good market analysis is necessary in order to determine the business
concept’s feasibility. This information provides the basis for the market section of
the Business Plan (Bangs 2000; Hoagland & Williamson 2000; Truitt 2002;
Thompson 2003b).

Think Theory 2

Can you think the most common areas of feasibility?


Summary
(Take a pen and write down your answer. As soon as you finish
thinking and writing, check at the end of the topic overview for
In feedback)
this topic we examined the importance of understanding the industry in which
the Entrepreneur is planning to conduct business. We analyzed the needto
select specific targets of customers who will benefit from the new busine ss
proposition (they will enjoy value for money). We then focused on the
competitiveness of the business and examined how this is largely dependent on
its level of creativity. The entrepreneur has to assess the extent to which the
new business innovates or commoditizes and the extent to which the business
proposition includes different products or the same products but used in different
ways to its competitors. Finally, we examined the critical survival factors for a
new business which will determine its future success, or failure. In addition, we
looked at which business model will be applied before proceeding with a
feasibility study in order for the entrepreneur be able to take the right decisions
that will determine success.

Feedback to think theory boxes:

Think theory 1

In a high competitive environment the entrepreneur shall choose differentiation


strategy.

Let’s read the following extracts from “Customer Value Propositions in Business
Markets” by James C. Anderson, James A. Narus, and Wouter Van Rossum, Harvard Business Review

“Another pitfall of the all benefits value proposition is that many, even most, of
the benefits may be points of parity with those of the next best alternative,
diluting the effect of the few genuine points of difference. Managers need to
clearly identify in their customer value propositions which elements are points of
parity and which are points of difference.

Put yourself, for a moment, in the place of the prospective client. Suppose each
firm, at the end of its presentation, gives ten reasons why you ought to award it
the project, and the lists from all the firms are almost the same. If each firm is
saying essentially the same thing, how do you make a choice? You ask each of
the firms to give a final, best price, and then you award the project to the firm that
gives the largest price concession. Any distinctions that do exist have been
overshadowed by the firms’ greater sameness.

Favorable points of difference.

The second type of value proposition explicitly recognizes that the customer has
an alternative. The recent experience of a leading industrial gas supplier
illustrates this perspective. A customer sent the company a request for proposal
stating that the two or three suppliers that could demonstrate the most
persuasive value propositions would be invited to visit the customer to discuss
and refine their proposals. After this meeting, the customer would select a sole
supplier for this business. As this example shows, “Why should our firm purchase
your offering instead of your competitor’s?” is a more pertinent question than
“Why should our firm purchase your offering?” The first question focuses
suppliers on differentiating their offerings from the next best alternative, a
process that requires detailed knowledge of that alternative, whether it be buying
a competitor’s offering or solving the customer’s problem in a different way.

Knowing that an element of an offering is a point of difference relative to the next


best alternative does not, however, convey the value of this difference to target
customers. Furthermore, a product or service may have several points of
difference, complicating the supplier’s understanding of which ones deliver the
greatest value. Without a detailed understanding of the customer’s requirements
and preferences, and what it is worth to fulfill them, suppliers may stress points of
difference that deliver relatively little value to the target customer. Each of these
can lead to the pitfall of value presumption: assuming that favorable points of
difference must be valuable for the customer. Our opening anecdote about the IC
supplier that unnecessarily discounted its price exemplifies this pitfall.”

Think theory 2

The common areas of feasibility are Technical, Economic, Legal, Operational,


and Scheduling – (TELOS acronym)

 Technology - The assessment is focused on gaining an understanding of


the present technical resources. It is an evaluation of the hardware and
software and how it meets the needs of the business.
 Economic - The purpose of the economic feasibility assessment is to
determine the positive economic benefits to the business that the
proposed system will provide. It includes identification and quantification of
all the benefits expected. This assessment typically involves a cost/
benefits analysis.

 Legal - Determines compliance, whether the proposed business model /


operation and/or products conflict with any legal requirements.

 Operational - The operational feasibility assessment focuses on the


degree to which the proposed business ‘fits in’ with the existing industry
environment and the degree to which the business operations will achieve
business objectives.

 Scheduling - A business may fail if it takes too long to start operating. The
business environment changes constantly. In addition, the business must
estimate when it will start generating income. Schedule feasibility is a
measure of how reasonable the implementation plan is.

Other feasibility factors

 Market and real estate – This typically involves testing geographic


locations for business location or locations as a retailer and/or
manufacturer or importer etc according to the business model to be
applied.

 Resource - This involves questions such as how much time (labor hours)
will be needed to operate.

 Cultural – This involves evaluation of cultural factors in the external


business environment. It examines the behavior norms of consumers,
potential customers and business associates and their impact on business
operation and objectives. Moreover, it involves evaluation of the internal
culture of the business in order to decide which culture is most appropriate
for the business to effectively achieve its objectives.

 Financial – This determines the financial needs. How much capital does
the business need? What is the most appropriate capital structure, and
debt equity ratio, and cost of capital? How will cash flow and profitability
be projected? It also identifies the full details of the assets to be financed
and the rate of conversion to cash-liquidity (i.e. how easily can the various
assets be converted to cash?). In addition it examines adverse economic
conditions and their impact on the business objectives.
 Market Research Study & Analysis - This is one of the most important
sections of the feasibility study as it examines the marketability of the
product or services and convinces readers that there is a potential market
for the product. If a significant market for the product cannot be
established, then there is no business. Typically, it will assess the
potential sales of the product and potential market penetration of the
product.

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