COMPETITIVE ANALYSIS IN BUSINESS

Learning Outcomes: After participating in the course, students will be able to:
Understand the five fundamental forces of competition in an industry and the ways to cope with
each force.
Analyze the nature of competition within an industry, employing the concept of strategic groups.
Identify the three generic competitive strategies that they can use for their business venture in the
long run.
Diagnose probable moves by competitors and their ability to react.
Systematically examine many discrete activities a firm performs and analyze their interactions as
sources of competitive advantage.
Understand the cost behavior & identify and master the cost drivers.
Understand how a firm can assess the relative cost of competitors and achieve a sustainable cost
advantage.
Present a framework for analyzing differentiation and choosing a differentiation strategy by
highlighting some common pitfalls in pursuing one.

Topics to Be Covered:
1. The Structural Analysis of Industries: Structural determinants of the intensity of competition -
Entry barriers or threats of potential entrants - Bargaining power of buyers - Bargaining power of
suppliers - Intensity of rivalry among the established firms - Impact of substitutes - Industry Structure
and Buyer needs Industry structure and the supply/demand balance.

2. Structural Analysis within Industries: Dimensions of Competitive strategy - Strategic groups

and a firm's profitability - The strategic group map as an analytical tool.

3. Generic Competitive Strategies: Cost leadership Differentiation - Focus - Stuck on the middle -
Pursuit of more than one generic strategy.

4. A Framework for Competitor Analysis: Components of competitor analysis The competitor

response profile - Market signals - Types of market signals - Competitive moves.

5. The Value Chain and Competitive Advantage: The value chain - Identify value activities -
Linkage within the value chain - Vertical linkages - Buyer value chain - Competitive scope and the
value chain.

6. The Value Chain Cost Analysis: Defining the value chain for cost analysis - Assigning costs and
assets - First cut analysis of cost behavior - Cost drivers - The cost of purchased input - Segment cost
behavior Cost dynamics.

7. Cost Advantage Determinants: The relative cost of competitors - Gaining cost advantages -
Sustainability of cost advantages - Pitfalls in Cost Leadership Strategies.

8. Sources of Differentiation and Value Chain: Drivers of Uniqueness Buyer value and
differentiation - Buyer purchase criteria - Routes to differentiation - Sustainability of differentiation.

Course Outline | MKT 5102

 Chapter 1 | The structural Analysis of Industries

Industry: is a group of manufacturers or businesses that produce a particular kind of goods or

services.
It is a choice of where to draw the line -
► between established competitors and substitute products,
► between existing firms and potential entrants,
► between existing firms and suppliers and buyers.
Generally, Industry means, the group of firms producing products that close substitutes for each other.

Competitive Analysis
A competitor analysis, also referred to as a competitive analysis, is the process of identifying
competitors in your industry and researching their different marketing strategies. You can use this
information as a point of comparison to identify your company's strengths and weaknesses relative to
each competitor.

Competitive forces:
Competitive forces are the factors and variables that affect a company's profitability and its growth.
1. The entry of new competitors
2. The threat of substitutes
3. The bargaining power of buyers
4. The bargaining power of suppliers
5. The rivalry among the existing competitors

Fig.: Michael Porter’s Five Forces Model

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General Effects of Competitive Forces:
● The collective strength of these competitive forces determines the ability of firms in an industry to
earn, on average, rate of return in investment in excess of the cost capital.

● The cost of capital is the rate of return required to 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑡𝑢𝑟𝑛 =

𝑆𝑢𝑚 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛𝑠
persuade the investor to make a given investment.

● The strength of five forces varies from industry to industry, and can change as an industry evolves
(from simple to a complicated form). The result is that all industries are not alike from the
standpoint of inherent (natural) profitability.

● These forces determine industry profitability because they influence the prices, costs, and required
investment of firms in an industry.

Industry profitability and competitive forces

Competitive forces are the factors and variables that threaten a company's profitability and prevent its
growth.
1. The threat of entrants can limit the prices and shape the investment.
2. Substitute products influence the prices that firms can charge.
3. Bargaining power of buyers also can influence cost and investment (costly services may be
demanded by the buyers).
4. The bargaining power of suppliers determines the cost of raw materials and other inputs.
5. The intensity of rivalry among the existing competitors can influence prices as well as the cost of
competing in areas such as plan, product development, advertising, and sales forces.

OR,

Competitive forces are the factors and variables that threaten a company's profitability and prevent its
growth:

1. The threat of new entrants: If it's easy for new companies to join, there will be more
competition. This could make it harder for existing companies to make a lot of money because
they have to share with others.

2. The threat of substitutes: Imagine if there are other products similar to the one you're using. If
you can easily switch to those other products, the companies might have to lower their prices or
make their products better to keep customers interested.

3. The bargaining power of buyers: Buyers are the people who buy products from companies. If
buyers have a lot of power, they can ask for lower prices. This might mean companies earn less
money on each sale.

4. The bargaining power of suppliers: Suppliers are the ones who provide companies with what
they need to make their products. If suppliers have a lot of power, they can charge more money.
This can lower the profits of the companies buying from them.

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5. The rivalry among the existing competitors: This is like the competition between players in the
game. If everyone is fighting hard to win, companies might have to lower prices to get more
customers. This can make it tough for them to make a lot of money.

Elements of Industry Structure

- The strength of each of the five competitive forces is the function of Industry Structure. i.e
underlying economic and technical characteristics of each force of an industry determines the
strength of each force.
- These forces jointly determine the intensity of industry competition and profitability, and strongest
forces are governing and become crucial from the point of view of strategy formulation.
- All the elements of industry structure that may drive competition in the industry.

1. Threat of New Entrants:

➔ New entrants to an industry bring new capacity,
➔ The desire to gain market share,
➔ The desire to gain significant resources, and
➔ The threat of entry into an industry depends on the barriers to entry.

Sources of barriers to Entry:

1. Economies of scale: (refer to the cost advantage experienced by a firm)It discourages entry by
forcing the entrant to come in at large scale and risk. For example, scale economies in
➔ Efficient production
➔ Reduction in promotion cost
➔ Buy in bulk
➔ Spread risks
➔ Reduction in logistics costs
➔ Cheaper capital
2. Product differentiation: It means that established firms have brand identification and customer
loyalties, which stem from past advertising, customer service, product differences, or simply being
first into the industry.
3. Capital requirements: The need to invest large financial resources
4. Switching cost: One- time costs facing the buyer of switching from one supplier's product to
another's.
5. Access to distribution channels: new entrant's need to secure distribution for its product.
6. Government policies: Standards for product testing, common in industry like food and other
health-related products, can impose substantial

2. Rivalry Among Existing Competitors

Rivalry is intensify due to using tactics like :-
➔ price competition,
➔ advertising battles,
➔ product introductions, and
➔ increased customer service or warranties etc.

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Competitive moves by one firm have noticeable effects on its competitors and thus may stimulate
retaliation or efforts to counter the move.

Various factors intensify competition:

The factors that can intensify competition:-
1. Numerous or Equally Balanced Competitors: foreign competitors, either exporting into the
industry or participating directly through foreign investment, play an important role in industry
competition.
2. Slow Industry Growth: Limited market share, difficult to utilize firm's financial and managerial
resources.
3. High Fixed Costs: Difficult to use full capacity.
4. Lack of Differentiation or Switching Costs:
5. Capacity Augmented (to increase) in Large Increments: Effects on demand and supply balance.
6. Diverse Competitors: Competitors diverse in strategies, origins, personalities, and relationship to
their parent companies have differing goals and differing strategies for how to compete
7. High Exit Barriers: Exit barriers are economic, strategic, and emotional factors.

The major sources of exit barriers

➔ Specialized assets: assets highly specialized to the particular business or location has low
liquidation values (the total worth of a company's physical assets if it were to go out of business
and the assets sold) or high costs of transfer or conversion.
➔ Fixed costs of exit: these include labor agreements, resettlement
costs, maintaining capabilities for spare parts, and so on.
➔ Strategic interrelationships: interrelationships between the business unit and others in the
company in terms of image, marketing ability, access to financial markets, shared facilities, and so
on. They cause the firm to attach high strategic importance to being in the business.
➔ Emotional barriers: management’s unwillingness to make economically justified exit decisions is
caused by identification with the particular business, loyalty to employees, fear for one’s own
career, pride, and other reasons.
➔ Government and social restrictions: these involve government discouragement of exit out of
concern for job loss and regional

3. Pressure From Substitute Products

Substitutes limit the potential returns of an industry by placing a ceiling (limit) on the price. The more
attractive the price-performance alternative offered by substitutes, the firm lid (closure) on industry
profits.
Determinants of Substitute Threat:
● Relative price performance of substitutes
● Switching costs
● Buyers’ propensity (tendency) to substitute.

4. Bargaining Power of Buyers

➢ If a large portion of sales is purchased by a given buyer this raises the importance of the buyer’s

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 business.
➢ Buyers compete with the industry by forcing down prices, bargaining for higher quality or more
services, and playing competitors against each other.
➢ If the buyer has full information about demand, actual market prices, and even supplier costs, this
usually gives the buyer greater bargaining force than when information is relatively poor.

When is a buyer group powerful ?

➔ Large volume purchase related to seller sales
➔ Selective purchase
➔ Purchase standard or undifferentiated products
➔ It faces switching costs (if seller faces)
➔ It earn low profit
➔ Backward integration (i.e. lack of proper backward integration e.g. garments industry)
➔ The buyer has full information.

5. Bargaining Power of Suppliers

➢ Suppliers can exert (use) bargaining power over participants in an industry by threatening to raise
prices or reduce the quality of purchased goods and services.
➢ If the industry is not an important customer of the supplier group.
➢ When suppliers sell to a number of industries and a particular industry does not represent a
significant fraction of sales, it is much easier for suppliers to apply power.

When a supplier group is powerful?

➔ Few companies ( as suppliers)
➔ Not obliged to compete with other substitute
➔ The industry is not an important customer of the supplier group
➔ The suppliers product is an important input to the buyers business, and
➔ Products are differentiated (suppliers product)

Industry Structure and Buyer Needs

The core of success in business is satisfying buyer needs. So, the industries profitability depends on
how firms within the industry are
➢ Meeting the buyer's needs and
➢ How they maintain the supply-demand balance.
➢ The strength of the five competitive forces is a function of industry structure and these can
positively or negatively influence profitability.
➢ The buyer must be willing to pay a price for a product that exceeds its cost of production;
otherwise industry will not survive in the long run.
The crucial question in determining profitability is who will capture the value that they create. (Value
means the customers estimate of the products or services overall capacity to satisfy their worthfull
needs).

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In this context, a firm can take strategies to enter in an industry-
● To compete away the value through lower price with equal benefit or equal price with excess
benefit.
● Try to retain most of the value for the buyer as their bargaining power is high.
● Differentiate products from substitutes that can meet the same buyers needs.
● Use appropriate suppliers' products for creating value due to the bargaining power of suppliers.
● By lowering prices or dissipating (spreading) it at a higher cost of competing for providing the
same value due to the intensity of rivalry.
However, five forces play key role:
● New entrants can bid down prices
● Existing firms will expand capacity aggressively.
● Exit barriers keep firms from leaving an industry due to high capacity

Structural Analysis and Competitive Strategy

After diagnosing the underlying causes of the forces that affect the level of competition. The firm will
identify its strengths and weaknesses.
In this regard, an effective competitive strategy takes offensive or defensive action in order to create a
defendable position against the five competitive forces. i.e.
● Where does the firm stand against substitutes?
● Against the sources of entry barriers?
● How are they coping with rivalry from established competitors? etc.

A firm can take under mentioned approaches:

Positioning:
A firm can build defense against strongest competitive forces or find a position where the forces are
weakest. i.e. knowledge of the firm’s capabilities and the causes of the competitive forces will
determine where the firm will stand for (the firm should confront or avoid).

Influencing the balance:

Structural analysis can be used to identify the key factors that drive competition In the particular
industry. In this regard, the firm may set places where strategic action can influence the balance
between forces and firms capabilities which will yield the greatest payoff.

Exploiting change:
Industry evolution (more mature) brings with its changes in the structural sources of competition. The
firm can use its strengths (economies of scales, investment, differentiations etc.) to exploit change in
their favor which may create barriers for new entrants.

Diversification Strategy:
Structural analysis can be used in setting diversification strategy. The existing firm may enter into a
new industry in which the business doesn't currently operate, while also creating a new product for
that new market through acquisition. It may help to overcome key entry barriers through shared
functions.

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 Chapter 2 | Structural Analysis within Industries

Dimensions of Competitive Strategy

The possible differences among a company’s strategic options in a given industry is determined on
the basis of some activities called strategic dimension. It does indicate the extended concept of
structural analysis to explain differences in performance of firms in the same industry and providing a
framework for guiding the choice of the competitive strategy. However, Companies' strategies for
competing in an industry can differ in a wide variety of ways.

Dimension of Competitive Strategy

■ To be determined on the basis of some activities.
■ Differences in performance of firms in the same industry.
■ Providing a framework for guiding

The Activities of Strategic Dimension:

Companies’ strategies for competing in an industry can differ in a wide variety of ways such as:-
► Specialization: The degree to which it focuses its efforts in terms of the width of its line, the
target customer segments, and the geographic markets served.
► Brand identification: The scale to which it seeks brand identification rather than competition
based mainly on price or other variables.
► Push Vs pull strategy: The level to which it seeks to develop brand identification with the
ultimate consumer directly or to support the distribution channels.
# Push strategy: A promotion program aimed primarily at middlemen
# Pull strategy: Promotion program directed primarily at end-users. The intention is to motivate
them to ask retailers for the product.
► Channel selection: Company-owned channels or broad line means.
► Product quality: It should be measured in terms of raw materials, specifications, features, and so
on.
► Technological leadership: The degree to which it seeks technological leadership vs following or
imitation.
► Vertical integration The extent of value added as reflected in the level of forward and backward
integration adopted, including whether the firm has captive/inclusive distribution, exclusive or owned
retail outlet, an in-house service network, and so on;
► Cost position: The extent to which it seeks the low cost position in manufacturing and
distribution.
► Service: The degree to which it provides ancillary (necessary or supporting) services with its
product line. Such as engineering, assistance, an in-house service network, credit etc.
► 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 distinct strategic variable that must
be treated separately.

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► Leverage: The amounts of financial leverage and operating leverage it bears.
# Financial leverage is the use of debt to buy more assets. It is employed to increase the return on
equity.
# Operating leverage measures a company's fixed costs as a percentage of its total costs. It is used
to evaluate the breakeven point of a business, as well as the likely profit levels on individual sales.
► Relationship to home and host government: Government can provide resources or other assistance
to the firm, or conversely can regulate the firm or otherwise influence its goals.

Strategic Groups
Basically, a Strategic Group is the group of firms in an industry following the same or similar
combination strategies along with strategic dimensions. For example, the restaurant industry can be
divided into several strategic groups including fast-food and fine-dining based on variables such as
preparation time, pricing, and presentation.
The firms in the same strategic group generally resemble one another closely in many ways besides
their broad strategies.

An industry could have only one Strategic Group or different Strategic Group such as
► Broad product lines, heavy national advertising, extensive integration and captive (inclusive)
distribution and service characterize one Strategic Group.
► Another Strategic Group can consist of specialist producers focusing on high quality, high price,
and segment with selective distribution.
► Another group may produce unadvertised products for private label (brand).

Reasons to form strategic group :

➔ Strategic groups are present for a wide variety of reasons:
➔ Differing initial strengths and weaknesses
➔ Differing times of entry into business
➔ Historical accidents

Strategic Groups and Firm's Profitability

Differing strategic groups can have varying situations with respect to competitive forces acting on
industry. However, Entry barriers protect all firms within the strategic group in an industry and
overall entry barriers depend on the particular Strategic Group that the entrant seeks to join. Also it
provides barriers to shifting position from one Strategic Group to another

Market power and profit potential of an individual firms within a strategic group depends on:-
1. Common industry characteristics:
2. Characteristics of Strategic Group:
3. Firm’s position within its Strategic Group:

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1. Common industry characteristics:
It determines the strength of five competitive forces. Consequently it also determines the
characteristics of strategic groups as well as the power of a firm. The industry characteristics of
market structure may increase or decrease profit potentials for all firms in the industry.

The determinants of industry characteristics are as follows: -

■ Rate of growth of industry demand.
■ Overall potential for product differentiation
■ Structure of supplier industries
■ Aspect of Technology

2. Characteristics of Strategic Group:

The characteristics of Strategic Group may raise or lower profit potential for all firms in the industry,
but not all strategies in the industry have equal profit potential.

The under mentioned characteristics of Strategic Group may raise the average profit potential of
firms: -
■ The higher the mobility barriers protecting the Strategic Group
■ The stronger the group’s bargaining position with suppliers and customer
■ The lower the group’s vulnerability (defenselessness) to substitute products, and
■ The less exposed the group is to rivalry from other groups.

3. Firm’s position within its Strategic Group:

Firm’s scale of production relative to others in its Strategic Group may affect a firm’s structural
position. The under mentioned position within its Strategic Group may influence profit potentials of
firms: -
■ The degree of competition within the Strategic Group
■ The scale of production of the relative to others in its group
■ Costs of entry into the group
■ The ability of the firm to execute or implement its chosen strategy in an operational sense.

Guidance for the formulation of strategy

Formulating competitive strategy in an individual industry can be viewed as the choice of which
Strategic Group to compete in. The guidance for the formulation of strategy is stated in terms of
matching a firm’s strengths and weaknesses, its distinctive competence, the opportunities and risks in
its environment.

Strengths Weaknesses
■ Build the mobility barriers ■ Lower the mobility barriers
■ Bargaining power ■ Worsening the bargaining power
■ Insulating its group from rivalry ■ Exposing its group form rivalry

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 ■ Volume of production ■ Smaller scale relative to its S.G
■ Lower cost of entry into its S.G ■ Higher costs of entry
■ Strong implementation abilities ■ Weaker implementation abilities
■ Resources and skills allowing the firm to ■ The lack of resources and skills would allow
overcome mobility barriers and move into even the firm to overcome mobility barriers and move
more desirable S.G into even more desirable S.G

Strategic Opportunities for Forming S.G.

The strategic opportunities facing the firm in its industry can also be made more concrete.
Opportunities can be divided into:
➔ Create a new Strategic Group Shift to a more favorably situated S.G
➔ Strengthen the structural position of the existing group or the firm's position in the group
➔ Shift to a new group and strengthen that group’s structural position.

The risks for Forming S.G.

The risks facing a firm can be identified by -
➔ Risk of other firms entering its Strategic Group.
➔ Risks of factors reducing the mobility barriers of the firms S.G lowering power with customers or
suppliers, worsening position relative to substitute products, or exposing it to greater rivalry.
➔ Risks that accompany investments designed to improve the firm's position by increasing mobility
barriers.
➔ Risks of attempting to overcome mobility barriers into more desirable S.G or entirely new groups.

The Strategic Group Map

The Strategic Groups map is an analytical tool in an industry that can be displayed on a map.
An industry can be mapped several times, using various combinations of strategic dimensions, to help
the analyst see the key competitive issues, in this regard; Strategic Group Map is a tool that will help
to diagnose competitive relationships.

Reasons:
►differing initial strengths and weaknesses,
► differing times of entry into the business, and
► historical accident
► way to display competition in an industry

Tasks of an analyst:
► strategic variables will be selected
► selected variables that do not move together
► need not be continuous or monotonic variables

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Analytical steps for constructing a strategic group map
➔ Identifying mobility barriers: the mobility barriers that protect each group from attacks from
other groups and be identified
➔ Identifying marginal groups: the group whose position is tenuous or marginal, these are the
candidates for exit or taking attempts at moving into another group.
➔ Charting direction of strategic movement: a very important use of the strategic group map is to
chart the directions in which firms strategies are moving and might shift from an industry wide
point of view.
➔ Analyzing trends: viability of the trends, placement of the shifting group, trends of elevating the
barriers held by some group; reduction of the ability to separate them along with some dimension
etc.
➔ Predicting reaction: the map can be used to predict reactions of the industry to an event.

Chapter 3 | Generic Competitive Strategies

Generic Competitive Strategies

Sustainable Competitive advantages in an industry is the fundamental basis of earning above-average
performance in the long-run.

There are two basic types of competitive advantage a firm can possess:
➔ Low cost, and
➔ Differentiation

Achieving competitive advantage requires a firm to make choice such as:-

▶ The type of competitive advantage it seeks to attain, and
▶The scope within which it will attain.

In coping (in dealing with) Five Competitive forces for achieving competitive advantage, there are
three potential successful generic strategies:
► Cost leadership
► Differentiation, and
► Focus

Cost leadership
Though cost leadership, a firm sets out to become the low cost producer in its industry. The sources
of cost advantage are varied and depend on the structure of the industry.

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Cost leadership requires:-
➔ Efficient scale facilities
➔ Cost reduction from experience
➔ Tight cost and overhead control
➔ Avoidance of marginal customer accounts
➔ Cost minimization in R&D, Service, Sales force, Advertising etc.

Required Skills and Resources Cost leadership :

➔ Heavy capital investment is required
➔ Engineering skills
➔ Intense supervision of labor
➔ Product designed for case in manufacture
➔ Low cost distribution system

Organizational Requirements:
➔ Tight cost control
➔ Structured organization and responsibilities
➔ Incentives based on achieving qualitative targets

Risk of Overall Cost Leadership:

Implementing this strategy, reinvestigation in modern equipment, withdrawal of obsolete assets,
avoiding product line proliferation ,and being alert for technological improvements is required.
➔ Technological change that nullifies past investments or learning.
➔ Low cost producer may be encouraged to enter the market
➔ Inability to see required product or marketing change (because the attention placed on cost).
➔ Inflation (price rise) in cost that narrows the firm's ability to maintain enough of a price
differentiates.

Reasons for Succeeded of Cost Leadership :

➔ Defense (protection) against Rivalry from competitors (because it can still earn returns after its
competitors have competed away their profits through rivalry).
➔ Defends the firm against Powerful Buyers but a great deal of attention is given on quality, service,
and other areas (powerful buyers try to drive down prices to the level of the next most efficient
competitors. But in this strategy)
➔ Defense against Powerful Suppliers by providing more flexibility to cope with input cost increases.
➔ Provides substantial Entry barriers in terms of scale economies or cost advantages.
➔ Usually places the firm in a favorable position vis-à-vis substitutes relative to its competitors in the
industry.

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Differentiation
The company concentrates on creating a highly differentiated product line and marketing program. It
does not allow the firm to ignore cost. For earning above-average returns in an industry it creates a
defensible position for dealing with the five competitive forces.

Form of differentiation:
❖ Though Design or Brand Image
❖ Technology
❖ Features
❖ Customer Service
❖ Dealer Network or other dimensions

Advantages of differentiation :
► It provides insulation (protect something from unpleasant effects) against rivalry because of brand
loyalty by customers and lower sensitivity to price.
► It increases margins, which avoids the need for low-cost position
► It helps to deal with supplier power due to the higher margins
► It clearly mitigates (make less severe) buyer power because of brand loyalty by customers and
resulting lower sensitivity to price.

Required Skills and Resources of differentiation:

➔ Strong marketing abilities
➔ Product engineering
➔ Creative flair (Natural ability to do something)
➔ Strong capability
➔ Reputation for quality or technological leadership
➔ Strong cooperation from channels.

Organizational Requirements:
➔ Strong coordination among functions in R&D, Product development and Marketing
➔ Subjective measurement (based on your own ideas or opinions rather than fact) and incentives
instead of quantitative measures
➔ Amenities to attract highly skilled labor, scientists, or creative people.

Risks of Differentiation Strategy:

➔ It is difficult to maintain brand loyalty (because buyers may sacrifice some of the features,
services, or image possessed by the differentiated firm).
➔ Buyers become more sophisticated (because buyers may perceive the form of differentiation as
falling).
➔ Imitation (replication) narrows perceived differentiation.

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Focus Strategy:
Although the low cost and differentiation strategies are aimed at achieving their objectives Industry
Wide, the focus strategy is built around serving a particular Target .
As a result, the firm achieves either differentiation from better meeting the needs of the particular
Target, or lower cost in serving this Target, or both

It focuses on:
❖ Particular buyer group
❖ Segment of the product line,
❖ Geographic market

Reasons for success:

➔ The specializes needs of the target customer
➔ Stocking only their narrow product lines
➔ Order taking procedure
➔ Perfect location of warehouse
➔ Intensive controlling of record keeping

Risks of focus strategy:

➔ Eliminate the cost advantage or to equalize the differentiation achieved by focus.
➔ The differences in desired products or services between the strategic target and the market as
whole narrows.
➔ Competitors may find it as a sub market within the strategic target.

Stuck in the Middle:

If any firm fails to develop its strategy, at least one of the three directions is called stuck in the
middle. This type of relationship means U-shaped due to the relationship between profitability and
Market share. These type firms do not have

If any firm fails to develop its strategy, at least one of the three directions is called stuck in the
middle. This type of relationship means U-shaped due to the relationship between profitability and
Market share. These types of firms do not have
❖ The market share
❖ Capital investment
❖ Tenacity to play the low cost game

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 Chapter 4 | Competitor Analysis

Competitor Analysis
Competitive strategy involves positioning a business to maximize the value of the capabilities that
distinguish it from its competitors.
On the basis of the information a company
➢ May launch more precise (accurate) attack on its competitors as well as
➢ It may prepare a stronger defense against attacks.
Basically, competitive strategy involves positioning a business to maximize the value of the
capabilities that distinguish it from its competitors.

Competitor analysis is needed to answer:-

• Whom should they pick a fight with in the industry and with what sequence of moves?
• What is the meaning of a competitor's strategic moves and how acutely should it take it?
• What areas should they avoid?

Objectives of a competitor analysis:

➔ To develop a profile of competitors.
➔ To find out probable responses of feasible strategic move of the firms.
➔ To identify each competitor’s probable reaction of industry changes and broader environmental
shifts

Problems of competitors analysis:

• Analysis is not done explicitly in practice
• Risky assumptions can creep (causing an unpleasant feeling of fear) into marginal thinking about
competitors
• Difficult to collect information about competitors.

Causes are as follows:

►informal impression (idea, feeling, or opinion about sth),

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►conjectures (an opinion or idea that is not based on definite knowledge, and it is form by guessing),
and
►intuition (the ability to know something by using your feeling rather than fact) etc. which is not the
systematic way].

The components of Competitors Analysis

• Future Goals:
• Assumptions:
• Current Strategy, and:
• Capabilities

Future Goals: A knowledge of goals will allow predictions about whether or not each competitor is
satisfied with its present position and financial result.
Future goals will allow:
►To maximize the market share and/ or
►To the satisfaction of customer and/or
►Mix objectives:
➔ Target in terms of market leadership
➔ Technological position
➔ Social performance etc.
Moreover, Goals at various mgt. level
■ Corporate wide goals
■ Business unit/division goals
■ Goals that can be worked out for individual functional areas and key managers.

Ways to determine a competitor’s present and future goals: (by asking question)
★ Stated and unstated financial goals
★ Attitude of competitors towards risk
★ Economic and non-economic organizational values of belief
★ Organizational structure
★ Controlling and incentive system, accounting and leadership system
★ Sales growth and rate of return of the parent company
★ Parent company’s diversification plan
★ Performance and needs of other companies etc.

Assumptions:
Assumptions means a belief or feeling that something is true or that something will happen, although
there is no proof. It falls into two major categories:
The competitor’s assumption about itself
The competitor’s assumptions about the industry and the other companies in it.
Ways to determine a competitor’s assumptions:
► What are the relative positions in cost, product, quality, technology, and other key aspects?
► What are the historical or emotional identification?

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► Do they hesitate to utilize the full capacity?

Current Strategy
A competitor’s strategy is most usefully thought of as its key operating policies in each functional
area of the business and how it seeks to inter-relate the functions.
The main focus given on:
What the competitor is doing and can do? i.e. How is the firm currently competing?

A firm can take any one of the under mentioned specific strategy:
Position defense strategy: Position defense involves building superior brand power, making the
brand almost impregnable.
Flanking defense: leaders under attack would be foolish to rely on building fortifications (wall)
around their current products; the market leader should also erect outposts to protect a weak front or
possibly serve as an invasion base for counterattack.
Preemptive defense: A more aggressive maneuver is to attack before the enemy starts its offense.
Counter offensive defense: In a counteroffensive, the leader can meet the attacker frontally or hit it
flank or launch a pincer movement.
Contraction Defense: Large companies sometimes recognize that they can no longer defend all of
their territory. The best course of action then appears to be planned contraction.

Capability
A firm’s strengths and weaknesses will determine its ability to initiate or react to strategic moves and
to deal with environmental or industry events that occur.

Ways to determine a competitor’s capabilities:

► What are the competitor’s capabilities in each of the functional areas?
► How does the competitor measure up the tests of consistency of its strategy?
► Are there any probable changes in those capabilities as the competitor matures?

A firm should know the ability of its competitors to adapt with:

● Competing on cost
● Managing more complex product lines
● Adding new product
● Competing on service
● Escalation in marketing activities
Areas of competitor strength and weakness:
Products:
● Standing of products (from the user’s view point)
● Depth of the product line
Dealer/distribution:
● Channel coverage and quality
● Relationship among channel members
● Service of channels

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Marketing and selling
● skill in marketing mix
● Skill in marketing research and
● product development
● Training and skills of the sales forces
Operations
● manufacturing cost positions (economies of scale, learning curve, newness of equipment)
● Technological sophistication of facilities and equipment
● Location including labor and transportation cost
● Skill in capacity addition, quality control etc

Overall cost
● overall relative costs
● Shared costs or activities with other business units
Financial strength
● cash flow
● Short and long term borrowing capacity
● Financial management abilities including negotiation, raising capital.
Organization
● structure
● Labour management relationship
General management abilities
● leadership qualities
● Depth of management
● Age, training,

Research and engineering patents and copyrights R & Staff skills in terms of creativity, simplicity,
quality, reliability, etc.

Ways to prepare the competitor response profile:

A. Offensive (disgusting) moves:
• Satisfaction level with current position
• Probable moves
• Strength and seriousness of moves
B. Defensive (self protective) capabilities:
• Vulnerability
• Provocation
• Effectiveness of retaliation
C. Picking the Battleground:
• The laid back competitor: don't react quickly or strongly
• The Selective competitor: react on certain type of attack
• The Tiger competitors: react swiftly or strongly to any attack
• The stochastic competitor: No predictable reaction pattern.

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Competitor Intelligence System
Various data is required for knowing about competitor’s probable moves, condition of competitor’s
strategies, industry growth rate, industry structure etc.
Function of CIS:
Sources of data: Field data and published data. Sources of field data: Sales force, firm’s
engineering staff, distribution channels, suppliers, advertising agencies, personnel hired from
competitors, professional meetings, trade association, market research firms etc.
Published data: Articles, newspaper in competitor’s locations, government documents,
speeches of competitor’s management, patents records, court records etc.

Collecting Data ➡ ️Compile ➡ Cataloging ➡ Digestive ➡ Contact With strategist ➡ strategy

formulation

Market Signals
A market signal is any action by a competitor that provides a direct or indirect indication of its
intentions, motives, goals, or internal situation.
Most of them are:
► Bluffs,
► Warnings and
► Earnest commitments.

Indications of Signal:
►Significance for developing competitive strategy
► Essential supplement to competitors analysis
► Effective competitive moves
► An understanding of competitor’s components

Forms of Market signals

1. Prior announcements of moves
2. Announcements of results or actions after the fact
3. Public discussions of the industry by competitors
4. Competitors’ discussions and explanations of their own moves
5. Competitors tactics relative to what they could have done
6. Manners in ethnic strategic changes are initially implemented.

Causes of prior announcements of moves:

➔ Seeking to get buyers to wait for its new product
➔ To start a price war i.e. threat of actions to be taken
➔ To know competitor’s sentiments such as new warranty programs
➔ Role as threats to other competitors
➔ Communication with the financial community

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Announcements of results or actions after the fact:
► Plant addition, sales figures, and other actions
► Carry signals of the disclosed data.
► Misleading data

Public discussions of the industry by competitors :

► Show logic of their competitive moves
► Preemptive (challenging/costly) moves
► Attempt to communicate commitment
Competitors’ tactics relative to what they could have done A firm feasibly changes its product’s
price, advertisement cost, product characteristics etc. and wants to prove that how strong they are.

Chapter 5 | The value chain

The value chain

+
Value is the customer’s estimate of the product's overall capacity to satisfy his/her needs. One buyer
will buy a product/service from a company that they perceive (recognize) to offer the highest
customer delivered value.

Customer delivered value = (*Total customer value -*Total customer cost).

Total customer value is the bundle of benefits customers extract from a given product/service. It
may be product value, service value, personnel value, image value etc.

Total customer cost means monetary price, time cost, energy cost, psychic cost etc.

In competitive terms, value is the amount buyers are willing to pay for what a firm provides them and
it is measured by total revenue. i.e. a reflection of the price a firm’s product commands and the units
it can sell.

A firm is profitable if the value it commands exceeds the costs involved in creating the product.

Value chain is a collection of various interdependent activities for identifying ways to create more
value for the customers. i.e. it is a company tool (instrument/device) for identifying ways to create
more customer value and it is a collection of interdependent activities.

The Value Chain identifies some strategically relevant activities that create value and cost in a
specific business. i.e. the analysis of the relevant activities such as designing, producing, marketing,
delivering, and supporting activities and all these activities can be represented using a value chain.
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Value Chain is embedded (surrounded/rooted) in a larger stream of activities that is called value
system, which is shown below:

Company’s relative cost advantage and differentiation depends on the analysis of value chain

Sources of cost advantage:

► Low cost physical distribution system
► A highly efficient assembly process
► Superior sales force utilization

Differentiation depends on:

► High quality raw materials
► A responsive order entry system
► A superior product design

Identify Value Activities:

There are two ways to identify value activities such as:
► Primary activities:
► Supportive activities:

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Primary activities
There are five generic categories of primary activities involved in competing in any industry. Each
category is divisible into a number of distinct activities that depend on the particular industry and
firm's strategy. These activities are as follows:

► Inbound logistics: Activities related to sourcing, receiving, and storing raw materials or
components: such as material handling, warehousing. Inventory control, vehicle scheduling etc.

► Operations: Activities involved in turning raw materials into finished products or delivering
services: such as machining, packaging, assembly, Equipment maintenance, testing, printing etc.

► Outbound logistics: Processes related to the storage, distribution, and delivery of products to
customers: such as finished goods warehousing, material handling delivery vehicle operation order
processing, scheduling etc.

► Marketing and sales: Efforts to promote and sell products or services to potential customers:
such as advertising, promotion, sales force, channel selection and relation, pricing etc.

► Service: Activities aimed at providing customer support, maintenance, and after-sales service:
such as installation, repair, training, part supply, product adjustment etc.

Supportive activities
● Procurement: it refers to the function of purchasing inputs used in the firm’s value chain. In
primary activities, only the purchasing department handles a fraction e.g. Raw material is
purchased by traditional purchase department but other items like machine, ancillary product,
meals and lodging is purchased by plant manager, office manager and sales person respectively).

● Technology development: (it improves the product and the process. It is used instead of R&D,
because R&D uses it in a narrow sense). such as documents preparation, order entry system, media
research, process equipment design, servicing procedure etc.

● Human resource management: it consists of activities involved in the recruitment, hiring,

training, development, and compensation of all types of personnel.

● Firm infrastructure: it consists of a number of activities including general management,

planning, financing, accounting, legal, govt, affairs, and quality management.

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

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

► 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).

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► Quality assurance activities: that ensure the quality of other activities (such as monitoring,
inspection, testing, reviewing, checking, adjusting, and reworking, etc.).

Linkage within the value chain

Linkage within the value chain refers to the connections and relationships between different activities
or steps in the process of creating a product or delivering a service. These linkages are essential for
the smooth and efficient functioning of the value chain as a whole. Here's how linkage works within
the value chain:

1. Supplier Linkages: It starts with suppliers who provide materials or parts for a company's
products. Good communication with suppliers is crucial to ensure a steady supply of what's needed.

2. Internal Linkages: Inside a company, various departments like production, marketing, and sales
have specific roles. Linking these departments is important for smooth operations. For example,
production must talk to marketing to meet customer demands.

3. Distribution Linkages: Products need to reach customers. Effective links between distributors,
like wholesalers and retailers, help get products where they need to be.

4. Customer Linkages: Building strong relationships with customers is key. Feedback from
customers helps improve products and services. Providing great customer support matters too.

5. Technology Linkages: Technology is essential in today's business world. Links with tech
providers, software developers, and IT services help streamline operations and stay competitive.

6. Competitive Linkages: Knowing what competitors are doing is crucial. Links for competitive
analysis help understand market trends and stay ahead.

7. Regulatory Linkages: Many industries have rules and standards to follow. Links with regulators
ensure legal compliance and meeting industry standards.

8. Environmental and Social Linkages: Being eco-friendly and socially responsible is important
today. Links with environmental groups and communities help address these concerns.

Managing these links well ensures that the value chain runs smoothly, delivering value to customers
efficiently. Companies that do this successfully tend to thrive in their industries.

Causes of Linkage:
● The same function can be performed in different ways: e.g. input, inspections effects quality.
● The performance of direct activities is improved by greater efforts in indirect activities: e. g.
better scheduling reduces sales force travel time.
● Activities performed inside a firm reduce the need to demonstrate, explain, or service a product in
the field: e.g. 100% inspection can considerably reduce service cost in the field.

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● Quality assurance functions can be performed in different ways: e.g. incoming inspection is a
substitute for finished goods inspection.

Vertical linkages
Linkages between firms at different levels of the value chain are critical for moving a product or
service to the end market. Vertical cooperation reflects the quality of relationships among vertically
linked firms up and down the value chain.

More efficient transactions among vertically related firms in a value chain increase the
competitiveness of the entire industry.

The nature of vertical linkages - Including the volume and quality of Information and services
disseminated-often defines and determines the benefit distribution along the chain and creates
incentives for, or constraints. upgrading.

The efficiency of the transactions between vertically linked firms in a value chain affects the
competitiveness of the entire industry.

An important part of value chain analysis is the identification of weak or missing vertical linkages.

How can value chain analysis help your business?

Take a look at some of the benefits you’ll have when performing a value chain analysis of your
business.

1. Increased profits: Value chain analysis forces you to look at your processes with profit in mind.
This gives you the clarity you need to increase customer value and cut costs – both of which can help
you increase your profit margin.

2. A competitive advantage: After conducting a value chain analysis, you’ll be able to compare your
operations, products and services with your competitors. It's at this stage you can pinpoint how to get
a competitive advantage and take the necessary steps to become the market leader.

3. New customers: Gaining a competitive advantage over rival businesses can help you entice new
customers. Consumers will choose you over your competitors because of the value you provide.

4. Improved efficiency: When analyzing your value chain, you’ll break down your company
logistics, operations and firm infrastructure. As a result, you’ll identify ways to streamline processes
and improve efficiency.

How linkage can lead to competitive advantage?

► Optimization: e.g. more costly product design, more stringent/tough materials specifications or
greater in-process inspection may reduce service cost.

► Coordination: e.g. for on time delivery, it may require coordination of activities in operation,
outbound logistics and service.

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Vertical linkage Linkages between firms at different levels of the value chain are critical for moving a
product or service to the end market. Vertical cooperation reflects the quality of relationships among
vertically linked firms up and down the value chain. More efficient transactions among firms that are
vertically related in a value chain increase the competitiveness of the entire industry.

Competitive Scope and the value chain

Competitive scope of an organization is defined as a function of the number of value chains (distinct
but interrelated) in which the organization is engaged. The competitive scope can be broad scope and
narrow scope.

There are four dimensions of scope that affect the value chain:
1. Segment scope (The product varieties produced and buyers served)
2. Vertical scope (The extent to which activities are performed in-house instead of by independent
firms).
3. Geographic scope (The range of regions, countries, or groups of countries in which a firm
competes with a coordinated strategy).
4. Industry scope (The range of related industries in which the firm competes with a coordinated
strategy).

Customer value chain

The customer value chain encompasses customer needs, how they use your product, and how to make
it easier for them to use your product.

There are four elements of customer value:

1. Quality: Quality refers to the level of excellence or superiority of a product or service. Customers
want products or services that meet or exceed their expectations and are free from defects.
High-quality offerings can lead to customer satisfaction and loyalty.

2. Service: Service encompasses the support and assistance that customers receive throughout their
interactions with a company. Excellent customer service involves addressing customer inquiries,
concerns, and problems promptly and effectively. Positive service experiences can enhance customer
loyalty and word-of-mouth recommendations.

3. Cost: Cost relates to the price customers pay for a product or service compared to the perceived
value they receive. Customers seek good value for their money. It's not just about low prices; it's
about the balance between price and perceived benefits. Companies that offer competitive pricing
while delivering value can attract and retain customers.

4. Time: Time is a critical factor in customer value. Customers value their time and expect efficient
and timely experiences. This includes quick delivery, fast response to inquiries, and reduced waiting
times. Companies that save customers time in their interactions are often seen as providing added
value.

26
By focusing on these elements companies can better understand and meet their customers' needs and
preferences, ultimately creating and delivering greater value to their customer base.

Chapter 6 | The Value Chain Cost Analysis

Defining the value chain for cost analysis:

The value chain is a concept that describes the sequence of activities a company undertakes to deliver
a product or service to its customers. Each activity in the value chain adds value to the product or
service, and analyzing the costs associated with these activities can help companies identify
opportunities for cost reduction and process improvement.

COMPONENTS OF VALUE CHAIN

The value chain is typically divided into two main categories of activities: primary activities and
support activities.
1. Primary Activities:

a. Inbound Logistics: This includes all activities related to receiving, storing, and distributing raw
materials and other inputs required for the production process.

b. Operations: These activities involve converting the raw materials into finished products or
services. It encompasses manufacturing, assembly, packaging, and testing.

c. Outbound Logistics: This comprises activities related to storing and distributing the finished
products to the end customers.

d. Marketing and Sales: These activities involve promoting the product or service, advertising,
sales, and managing customer relationships.

e. Customer Service: This includes activities related to providing after-sales support, addressing
customer inquiries, and handling product returns.

2. Support Activities:

a. Procurement: This involves sourcing and acquiring the necessary raw materials, supplies, and
services required for the value chain.

b. Technology and R&D: Activities related to research and development, process improvement, and
technological innovations that support the primary activities.

c. Human Resources: This includes all activities related to recruiting, training, and managing the
workforce.

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d. Infrastructure: Activities related to the company's overall administration, including finance,
accounting, legal, and other supporting functions.

METHODS USED FOR COST ANALYSIS IN THE VALUE CHAIN

Cost analysis of the value chain involves examining the costs associated with each of these activities.
It helps companies understand which activities are the most expensive, where cost savings can be
achieved, and where efficiency improvements can be made. Some common methods used for cost
analysis in the value chain include:
1. Activity-Based Costing (ABC): Allocating costs to specific activities based on their consumption
of resources.
2. Cost-Benefit Analysis: Evaluating the costs and benefits of specific activities or projects.
3. Total Cost of Ownership (TCO): Assessing the total cost of owning and operating assets or
systems throughout their lifecycle.
4. Benchmarking: Comparing a company's costs with those of its competitors or industry
benchmarks.

Assigning costs and assets:

Assigning costs and assets is a crucial aspect of financial accounting and management. Properly
allocating costs and assets allows a company to track its expenses accurately, determine profitability,
and adhere to accounting principles and regulations. Below, I'll explain how costs and assets are
assigned in financial accounting:

1. Cost Assignment:

Cost assignment involves attributing costs to specific cost objects. A cost object is anything for which
a separate measurement of cost is desired. Common cost objects include products, services, projects,
departments, or even individual activities or processes. There are three main methods for assigning
costs:

a. Direct Costs: These are costs that can be traced directly and specifically to a particular cost object.
For example, the cost of raw materials used to manufacture a specific product is a direct cost for that
product.

b. Indirect Costs: Also known as overhead costs, these are costs that cannot be directly traced to a
specific cost object. Instead, they are shared among multiple cost objects based on an allocation basis.
For example, the cost of factory rent or utilities would be considered indirect costs and may be
allocated to different products based on their usage of the production facility.

c. Allocated Costs: Some costs may not directly relate to any specific cost object but still need to be
assigned to cost centers or departments for decision-making and performance evaluation purposes.
These costs are allocated based on a predetermined allocation method, such as square footage, labor
hours, or machine usage.

28
2. Asset Assignment:

Asset assignment involves recording and classifying assets owned or controlled by a company in its
financial statements. Assets are economic resources that are expected to provide future benefits to the
company. Assets are typically classified into the following categories:

a. Current Assets: Assets that are expected to be converted into cash or used up within one year,
such as cash, accounts receivable, inventory, and short-term investments.

b. Non-Current Assets: Assets that have a longer life and are not expected to be converted into cash
within one year, such as property, plant, equipment, long-term investments, and intangible assets
(e.g., patents, trademarks).

c. Tangible Assets: Physical assets with a definite form and measurable value, such as machinery,
buildings, and vehicles.

d. Intangible Assets: Non-physical assets that lack physical substance but have significant value to
the company, such as patents, copyrights, trademarks, and goodwill.

Properly assigning costs and assets is essential for creating accurate financial statements, which
provide insights into a company's financial health, performance, and value.

First cut analysis for cost behavior:

A first-cut analysis of cost behavior involves classifying costs into different categories based on how
they respond to changes in activity levels within a specific range. Understanding cost behavior is
essential for effective cost management, budgeting, and decision-making. The two primary categories
of cost behavior are:
1. Variable Costs: Variable costs vary in direct proportion to changes in activity levels. As the level
of activity increases, variable costs increase, and vice versa. The total variable cost can be
represented as a linear function:

Total Variable Cost = Variable Cost per Unit of Activity x Number of Units of Activity

For example, in a manufacturing setting, the cost of raw materials used to produce a product is
typically a variable cost. If a company produces more units of the product, the cost of raw materials
will increase, and if production decreases, the cost of raw materials will decrease accordingly.
2. Fixed Costs: Fixed costs remain constant within a specific activity range, regardless of the level of
production or activity. These costs do not change in the short term, even if production volumes
fluctuate. Fixed costs can include items like rent, insurance, salaries of permanent employees, and
certain administrative expenses.

For example, if a company leases a production facility for a fixed monthly cost, that cost remains the
same whether the company produces 1,000 units or 10,000 units of a product within the lease period.

29
It's important to note that cost behavior may not always be entirely fixed or entirely variable. Some
costs exhibit mixed behavior, which means they have both fixed and variable components. For
instance, semi-variable costs have a fixed portion that remains constant and a variable portion that
changes with activity levels.

Identifying the nature of cost behavior is essential because it impacts financial planning, break-even
analysis, and decision-making. Here's how a first-cut analysis of cost behavior can be conducted:
1. Gather Data: Collect historical cost data and corresponding activity levels (e.g., units produced,
labor hours, sales volume) for a specific period.
2. Plot a Cost-Volume Graph: Create a graph with activity levels on the X-axis and total costs on the
Y-axis. Plot the data points and observe the pattern. If the graph shows a straight line, the cost is
likely to be linear and can be classified as variable or fixed.
3. Calculate Cost per Unit of Activity: Determine the variable cost per unit of activity by dividing
the change in cost by the change in activity.
4. Analyze the Scatter of Data Points: If the data points on the graph are tightly clustered around a
straight line, it suggests a high correlation between cost and activity, indicating cost behavior is
likely to be more fixed or variable. If the data points are spread out, it may indicate mixed or
semi-variable cost behavior.

Cost drivers:
Cost drivers are factors or variables that have a significant influence on the level of costs incurred by
a business or organization. Identifying cost drivers is important for understanding the underlying
reasons for cost variations and for managing and controlling expenses effectively.

Cost drivers can vary depending on the industry, company size, and the nature of operations. Here are
some common examples of cost drivers:
1. Production Volume: In many industries, such as manufacturing, the volume of production is a
significant cost driver. As production increases, variable costs like raw materials, direct labor, and
energy consumption increase proportionally. Fixed costs may also be influenced by production
volume indirectly through production-related expenses like maintenance and supervision.
2. Labor Hours: For labor-intensive businesses, the number of labor hours worked is a key cost
driver. As employees work more hours, direct labor costs and indirect labor costs, such as
overtime pay and employee benefits, increase.
3. Machine Hours: In industries that heavily rely on machinery, the number of machine hours
utilized can be a cost driver. Higher machine usage leads to increased maintenance, energy
consumption, and depreciation costs.
4. Activity Volume: This refers to the level of activity in non-manufacturing environments. For
example, in a service industry, the number of customers served, transactions processed, or
services rendered can drive costs.
5. Number of Customers: Businesses that provide customer-specific services or support, like
customer service centers, may find that the number of customers served drives costs related to
staff and support resources.
6. Distance or Travel: Companies that engage in delivery or transportation services often find that
distance traveled or the number of trips made is a significant cost driver for fuel, maintenance,
and labor expenses.
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7. Raw Material Prices: For businesses that rely heavily on raw materials, fluctuations in the cost
of inputs can be a major cost driver affecting their profitability.
8. Inventory Levels: Maintaining high inventory levels can lead to increased carrying costs, storage
expenses, and the risk of obsolescence, making it an important cost driver for inventory-heavy
industries.
9. Technology and Automation: The level of technological automation in a business can be a cost
driver, as upfront investments in technology may lead to reduced labor costs and increased
productivity over time.
10. Regulatory Compliance: In industries with strict regulatory requirements, compliance costs can
be a significant driver of expenses.

Identifying and monitoring cost drivers allow businesses to analyze cost structures, forecast expenses
accurately, and implement cost control measures to maintain a competitive edge in the market.

The cost value of purchased input:

The cost value of purchased inputs refers to the total expenditure incurred by a company to acquire
the necessary materials, goods, or services from external suppliers to support its production or
operational activities. Purchased inputs can include raw materials, components, finished goods for
resale, services, and any other items that are not produced internally by the company.

Calculating the cost value of purchased inputs involves considering the cost of each individual item
purchased, including any associated taxes, shipping, handling, and other related expenses. Here's how
you can calculate the cost value of purchased inputs:
1. Identify the Purchased Inputs: Determine all the materials, goods, or services that the company
acquires from external suppliers for its operations.
2. Obtain Purchase Invoices: Gather the purchase invoices or receipts for each of the identified
inputs. These documents provide the details of the purchased items and their respective costs.
3. Sum Up Individual Costs: Add up the costs of all the purchased inputs. This will give you the total
expenditure incurred for acquiring these items.

For example, let's consider a small manufacturing company that produces furniture. They purchase
various raw materials, such as wood, screws, paint, and upholstery materials, from different suppliers.
They also buy tools and equipment needed for the manufacturing process.

Suppose the company's purchase invoices for a specific period are as follows:
● Wood: $5,000
● Screws: $500
● Paint: $1,200
● Upholstery Materials: $3,000
● Tools and Equipment: $2,500

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To calculate the cost value of purchased inputs for this period, you would sum up the costs: Cost
Value of Purchased Inputs = $5,000 + $500 + $1,200 + $3,000 + $2,500 = $12,200

So, the cost value of purchased inputs for this period is $12,200.

Knowing the cost value of purchased inputs is essential for several reasons, including:
1. Cost Analysis: It helps businesses analyze the total expenditure on purchased inputs and identify
cost-saving opportunities.
2. Inventory Management: Understanding the cost value of inputs aids in managing inventory levels
and preventing stock outs or overstocking.
3. Pricing Decisions: Knowing the cost value of inputs is crucial for setting competitive prices for
products or services.
4. Cost of Goods Sold (COGS): The cost value of purchased inputs is a key component of calculating
the COGS, which is essential for determining gross profit.

By accurately calculating the cost value of purchased inputs, businesses can make informed decisions
to optimize their supply chain, control expenses, and improve overall financial performance.

Segment cost behavior:

Segment cost behavior refers to the classification of costs within different segments or divisions of a
company based on how those costs respond to changes in activity levels or changes in other relevant
factors. Analyzing cost behavior at the segment level allows businesses to better understand the cost
structure and performance of individual business units or product lines. This information is valuable
for making strategic decisions, setting prices, and optimizing resource allocation. There are three
main types of segment cost behavior:

1. Fixed Costs: Fixed costs are expenses that remain constant within a specific range of activity levels
or output for a segment. They do not vary in the short term, regardless of whether the segment's
production or sales volume increases or decreases. Examples of fixed costs include rent, salaries of
permanent employees, insurance, and depreciation of fixed assets.

For example, if a company has a manufacturing division, the fixed costs of that segment may include
the salaries of supervisors and administrative staff in the division, which do not change with the
number of units produced.

2. Variable Costs: Variable costs are expenses that fluctuate in direct proportion to changes in activity
levels or output for a segment. As the level of activity increases, variable costs increase, and vice
versa. Examples of variable costs include raw materials, direct labor, and direct sales commissions.

For instance, in the manufacturing division mentioned earlier, the cost of raw materials used in
production would be a variable cost because it increases as more units are produced.

3. Semi-Variable (Mixed) Costs: Semi-variable costs, also known as mixed costs, have both fixed
and variable components. The fixed portion remains constant within a relevant range of activity,
while the variable portion changes with the level of activity.

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A common example of a semi-variable cost is utility expenses, such as electricity or water bills.
There is a fixed portion, which is a basic service charge or minimum usage fee, and a variable
portion, which increases with the level of consumption.

.
.
.
Analyzing segment cost behavior is important because it provides insights into the cost structure of
each business unit or product line. Understanding which costs are fixed, variable, or semi-variable
helps in the following ways:

1. Pricing Decisions: Knowing the cost behavior allows businesses to set appropriate prices for
products or services that cover both variable and fixed costs and contribute to profit margins.

2. Profitability Analysis: By categorizing costs into fixed and variable components, companies can
assess the profitability of individual segments and identify areas for improvement.

3. Budgeting and Forecasting: Understanding cost behavior helps in creating accurate budgets and
forecasts, taking into account how costs will change with varying levels of activity.

4. Decision-Making: Businesses can make informed decisions about resource allocation, expansion,
or discontinuation of certain segments based on their cost behavior and contribution to overall
profitability.

In summary, segment cost behavior analysis is a valuable tool for businesses to better manage their
operations, enhance performance, and make strategic decisions that lead to improved financial results.

Cost dynamics:
To analysis cost behavior, a firm must consider how the absolute and relative cost of value activities
will change over time independent of its strategy means cost dynamics. ►It enables a firm to forecast
how the cost drivers of value activities may change ►It helps to know, which value activities will
increase or decrease in absolute and relative cost importance.

Sources of Cost Dynamics

►Industry real growth ► Differential scale sensitivity ► Differential technological change ► Rate
inflation of costs ► Aging ► Market adjustment

Cost dynamics refers to the factors that influence the changes in costs incurred by a business over
time or in response to changes in specific activities or events. It is also known as cost behaviour
dynamics or cost drivers.

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Understanding cost dynamics is crucial for effective cost management, budgeting, and
decision-making, as it helps businesses identify the reasons behind cost fluctuations and take
appropriate actions to control and optimize expenses. Here are some key aspects of cost dynamics:

1. Time-Based Cost Dynamics: Costs can change over time due to various factors such as inflation,
changes in technology, shifts in market conditions, and alterations in business strategies. For
example, the cost of raw materials may increase due to inflation, or the implementation of new
technology may lead to reduced labor costs over time.

2. Activity-Based Cost Dynamics: Costs are often driven by the level of business activities or output.
As activity levels change, certain costs may vary accordingly. For instance, in a manufacturing
setting, raw material costs and direct labor expenses tend to increase as production volumes rise.

3. Economies of Scale: Economies of scale refer to the phenomenon where the average cost of
production decreases as the scale of production increases. In other words, the cost per unit of output
decreases with higher production volumes. This cost dynamic is often observed in industries with
high fixed costs, such as manufacturing and distribution.

4. Learning Curve Effects: Learning curve effects occur when repetitive tasks become more efficient
over time due to increased experience and skill development. As employees become more familiar
with certain processes, the time and resources required for those tasks may decrease, leading to cost
savings.

5. Seasonality and Demand Variations: Some businesses experience seasonality, where costs
fluctuate based on seasonal changes in demand. For example, retailers may incur higher costs
during holiday seasons due to increased marketing efforts and temporary staffing.

6. Technology and Automation: The adoption of new technology and automation can significantly
impact cost dynamics. While initial investments may be high, technology can lead to cost
reductions through increased productivity and reduced labor requirements.

7. Regulatory and Compliance Costs: Businesses may incur additional expenses to meet new
standards or adapt their processes to comply with regulatory changes.

8. Market Conditions and Supplier Relationships: Changes in market conditions and relationships
with suppliers can affect input costs. For example, fluctuations in commodity prices can impact the
cost of raw materials, and changes in supplier terms may influence the cost of purchased inputs.

By understanding the various dynamics that influence costs, businesses can take proactive measures
to manage expenses effectively and improve their financial performance.

Chapter 7 | Cost Advantage

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Cost is the expenditure required to create and sell products and services, or to acquire assets. The
relative cost of competitors means how much money it takes for companies to do similar things.

Cost Advantage
A firm will gain competitive advantage if its growing cost of performing all value activities is lower
than that of competitors’ costs.

Cost advantage leads to superior performance if the firm provides an acceptable level of value to the
buyer so that its cost advantage is not nullified by the need to charge a lower price than competitors.

It is a function of
► The composition of its value chain versus competitors’
► Its relative position vis-à-vis the cost drivers of each activity.

Determining the relative cost of competitors:

►The first step is to identify competitor value chains and how they perform activities.
► Where a competitor’s cost can’t be estimated directly, the firm should employ comparison
(between itself and the competitor) techniques

Some of the areas in which companies may adjust spending to improve

their cost advantage:
1. Material cost: Organizations experience a cost advantage when their products cost less to make
because they can obtain the necessary materials at a lower price than their competitors.
2. Processes: When companies use processes that increase efficiency, reduce errors and decrease
the overall time for production, they can produce more and spend less while doing so.
3. Distribution: A business can increase its cost advantage by reducing its distribution costs. They
can do this by using new technology or implementing more efficient systems.
4. Management: A dedicated and skilled management system that focuses on improving a
company's cost advantage can oversee other aspects like material cost, processes, distribution,
automation and patents.
5. Automation: Using technology to automate parts of the production, distribution, sales or
marketing processes can decrease costs and increase a company's overall cost advantage.
6. Patents: Owning the patent to technology, materials or processes can increase a company's cost
advantage by giving them specific advantages that their competitors can't have.

Steps to Identify and Evaluate Competitors

Seven steps to identify, evaluate, and understand your competitors so you can price properly.
Step 1: Identify True Competitors
- Recognize direct rivals in your market.
- Focus on those impacting your pricing strategy.

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Step 2: Categorize the Competition
- Group competitors by similarities.
- Understand market segments and niches.

Step 3: Read Competitor Content

- Study their marketing materials.
- Gain insights into their messaging.

Step 4: Analyze Competitor Prices

- Examine their pricing structures.
- Identify pricing trends and patterns.

Step 5: Compare Your Websites

- Evaluate user experience and design.
- Uncover potential strengths or weaknesses.

Step 6: List out Value Propositions

- Outline unique selling points.
- Differentiate yourself from competitors.

Step 7: Determine Your Cost Advantage

- Assess your production and operational efficiencies.
- Pinpoint cost advantage for informed pricing.

Gaining cost advantage:

Two major ways:

► Reconfigure the value chain: A firm can adopt a different and more efficient way to design,
produce, distribute, or market the product.

► Control cost drivers: A firm can gain an advantage with respect to the cost drivers of value
activities representing a significant proportion of total cost.

Sources of Reconfigure the value chain :

►A different production process
► Differences in automation
► A new distribution channel
► A new raw material
► Direct sales instead of indirect sales
► Major differences in forward and backward vertical integration
► New advertising media
► Shifting the location of facilities relative to suppliers and customers

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Control cost drivers:
1. Controlling scale: Gain the appropriate type of scale, Set policies to reinforce scale economies
where the firm is favored.
2. Controlling learning: Manage with learning curve, keeping learning proprietary, and learning
from competitors.
3. Controlling the effect of capacity utilization: Level throughput reduces the penalty of
throughput fluctuations.
4. Controlling linkage: exploit cost linkage within the value chain, work with suppliers and channels
to exploit vertical linkages.
5. Controlling interrelationships: Share appropriate activities, Transfer know-how in managing
similar activities.
6. Controlling integration: Examine systematically possibilities for integration and de-integration.
7. Controlling timing: Exploit first-mover or late-mover advantages, Time purchases in business
cycle.
8. Controlling location: Optimize location
9. Controlling institutional factors: do not take institutional factors (such as government policies
and unionization) as a given.

Utilizing Cost Advantages in Business

Cost advantage is a strategic approach that businesses use to enhance their profitability by optimizing
production costs while maintaining competitiveness in the market.

1. Comparative Cost Advantage :

- Pricing products like competitors, but gaining higher profits through reduced production costs.
- Achieved by cutting expenses in materials, processes, and distribution.

2. Gain market share by lowering the price:

- Lower prices attract price-sensitive customers, enabling increased market share.
- Utilizes a market penetration strategy that leverages cost advantage.

3. Combine to develop a competitive advantage:

- Merge cost advantage with other advantages like comparative advantage, for a stronger market
presence.
- Cultivates customer loyalty and maintains a reliable market share.

Benefits of Cost Advantage

1. Increased Production Efficiency
- Improved cost efficiency enhances production process.
- More output in the same timeframe

2. Holistic Competitive Insight

- Cost advantage is a part of overall competitive edge.
- Uncover areas for comprehensive enhancement

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 3. Long-Term Customer Expansion
- Utilize cost advantage to establish loyal, lasting customer relationships.
- Augmented profits over the company's lifespan.

4. Room for Innovation and Growth

- Strong cost advantage provides resources for innovation.
- Fosters innovation and expansion opportunities.

Strategies for Sustaining Cost Advantage

Difference Between Cost Leadership and Price Leadership

Cost leadership is a strategy that companies use to achieve competitive advantage by creating a
low-cost-position among its competitors.
Price leadership refers to a situation where the dominant firm sets up the price of products or
services in the market.
=
Cost leadership and price leadership are two distinct strategies that organizations employ to gain a
competitive advantage in the market. While both strategies aim to lower costs and offer competitive
prices, there is a fundamental difference between the two.

Cost leadership is centered around achieving the lowest costs of production, allowing a company to
offer products or services at lower prices than its competitors. This strategy focuses on efficiency,
productivity improvements, and economies of scale. By reducing costs, the company can attract
price-sensitive customers and increase market share.

On the other hand, price leadership refers to a strategy where a company sets the industry benchmark
for prices. Rather than solely focusing on reducing costs, price leaders prioritize being perceived as
the reference point for pricing. This strategy allows companies to control the market, influence
competitors' prices, and potentially increase profits.

To illustrate the difference between the two strategies, the table below compares cost leadership and
price leadership:

Cost Leadership Price Leadership

Main Focus Lowering production costs Setting industry benchmark

prices

Market Strategy Offer products or services at Control market, influence

lower prices competitors' prices

Competitive Advantage Lower prices profit increase Market control,

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In conclusion, while both cost leadership and price leadership aim to provide competitive prices, the
difference lies in their main strategic focus. Cost leadership concentrates on reducing costs, whereas
price leadership revolves around setting the industry benchmark for prices. These strategies have
unique benefits and implications for companies' market positioning and profitability.

Chapter 8 | Differentiation

Differentiation
Differentiation is what makes your product or brand unique and sets it apart from competitors,

A firm differentiates itself from its competitors when it provides something unique that is valuable to
buyers beyond simply offering a low price. It is not only happen in product or marketing practices but
it can arise anywhere in a firm’s value chain.

Why Differentiation Matters?

➔ Standing Out in the Crowd
➔ Connecting with Emotions
➔ Sparking Curiosity
➔ Building a Strong Brand Identity

Differentiation allows a firm to command:-

► A premium price i.e. additional payment of price by lowering buyers cost or enhancing buyer
performance so that the buyers will be willing to pay price.
► To sell more of its product at a given price.
► To gain better buyer's loyalties.

Elements of Differentiation:
Product Features: Highlight unique features or attributes that make your product superior.
Quality: Emphasize superior quality compared to competitors.
Price: Offer a competitive price point that appeals to a specific segment.
Service: Provide exceptional customer service that sets you apart.
Brand Image: Cultivate a distinct brand personality that resonates with your audience.

Steps in differentiation:
1. Determine who the real buyer is.
2. Identify the buyer’s value chain and the firm’s impact on it.
3. Determine ranked buyer purchasing criteria.
4. Assess the existing and potential sources of uniqueness in a firm’s value chain.
5. Identify the cost of existing and potential sources of differentiation.
6. Choose the configuration of value activities.
7. Test the chosen differentiation strategy for sustainability.
8. Reduce cost in activities that do not affect the chosen forms of differentiation.

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Sources of Differentiation in the value chain
Differentiation grows out of the firm’s value chain and any value activity is a potential source of
uniqueness.
Various stages of the value chain provide opportunities for differentiation. The Sources can be two
types:
For supportive activities:-
• Firm infrastructure:
• Human resource management:
• Technological development:
• Procurement:

For Primary activities:-

• Inbound logistics:
• Operations:
• Outbound logistics:
• Marketing & sales:
• Service:

Drivers of Uniqueness
A firm’s uniqueness in value activities is determined by a series of basic drivers i.e. uniqueness
drivers are the underlying reasons why an activity is exceptional. Without the uniqueness of drivers it
is difficult for a firm to create differentiation.

Sources of Uniqueness:-
1. Policy choice:
2. Linkage:
3. Timing:
4. Location:
5. Interrelationships:
6. Learning:

►Policy choice:
- Product features and performance offered
- Service provided (e.g. credit, delivery, or repair)
- Intensity of an activity (e.g. rate of advertising spending)
- Content of an activity (e.g. order processing)
- Technology employed (e.g. effective machine tools etc.)
- Quality of inputs
- Skills and experience level of personnel
- Control an activity (e.g. temperature, pressure)

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►Linkage:
– Linkage within the value chain
– Suppliers linkage
– Channels linkage.

How linkages within channels can lead to uniqueness are as follows:

- Training channels in selling and other business practices
- Joint selling efforts with channels
- Investment in personnel, facilities, and performance of additional activities.

► Timing: Uniqueness may result from when a firm begun performing an activity i.e. First mover or
Late mover.
► Location: Uniqueness may originate from location
►Interrelationships: The uniqueness of a value activity may stem from sharing it with sister
business unit
►Learning: The uniqueness of an activity can be the result of learning about how to perform it
better.
►Institutional factors: Govt, union etc.

Buyer value and differentiation

A successful differentiator finds ways of creating value for buyers that give way a price premium.
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’s performance.

Mechanisms of creating buyers value:

● by lowering buyer cost
● by raising buyer performance

Ways of lowering buyer’s cost :

➔ lower delivery, installation, or financing cost
➔ lower the required rate of handling of the product
➔ lower the direct cost of using the product, such as labor, fuel, maintenance
➔ lower the indirect cost
➔ lower the buyer cost which is unconnected with the physical product
➔ lower the risk of product failure and thus the buyer’s expected cost of failure.

Raising buyer performance:

It depends on understanding what desirable performance i.e. differentiation from the buyer’s
viewpoint is. Also it is based on helping them meet their non-economic goals such as status, image,
or prestige. To understand buyers need is important.
e.g. a truck sold to a buyer who is a consumer goods company that uses it to carry goods to retail
stores. If the retail store desires frequent delivers, the consumer goods company will be very
interested in a truck with carrying capacity to make frequent deliveries at a reasonable cost.
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 _____

►Buyer purchase criteria:

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:

● Use criteria: specific measures of what creates buyer value. It is created through lowering buyer
cost or raising buyer performance
● Signaling criteria: measures of how buyers perceive the presence of value. i.e. it influences the
buyer’s perception of the firm’s ability to meet its use criteria.

► Signaling criteria included:

● Reputation or image
● Cumulative advertising
● Weight or outward appearance of the product
● Packaging and labels
● Appearance and size of facilities
● Time in business
● Customer list
● Market share
● Price
● Parent company identity (size, financial identity, etc.)

Routes to Differentiation
Routes to differentiation refer to methods a company can employ to stand out from its competitors
and create a unique position in the market. Two key routes include:

1. Enhancing Existing Value Activities:

- Companies may enhance their existing value activities by making them more unique and efficient.
- This could involve improving the quality or features of products/services, thereby offering
customers something different and valuable.
- The company can also focus on improving customer service, providing personalized experiences, or
offering additional after-sales support.

2. Reconfiguring the Value Chain:

- A company can reconfigure its value chain by changing the sequence or adding/removing specific
activities.
- This could involve integrating vertically or horizontally, outsourcing non-core activities, or
investing in new technologies.
- By reconfiguring the value chain, companies can create a competitive advantage through cost
reductions, improved speed, or access to new markets.

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Overall, these routes to differentiation enable companies to differentiate themselves and gain a unique
position in the market, ultimately driving success and growth.

The Sustainability of Differentiation

The sustainability of differentiation in the market is greatly influenced by two key factors:
1. Continued Perceived Value to Buyers: This refers to the ongoing belief among customers that a
product or brand offers something unique, desirable, and relevant to their needs or preferences. As
long as customers consistently see the value in the differentiated offering, it remains appealing and
retains its competitive edge.
2. Lack of Imitation by Competitors: This means that other companies are unable to easily replicate
or copy the distinctive features or qualities that set a product or brand apart. When competitors
struggle to imitate these unique elements, the original differentiator remains exclusive and retains its
competitive advantage.

How it can be more sustainable?

To ensure sustainability in differentiation, businesses must focus on the following:

1. Sources of uniqueness involve barriers: Differentiation should not be easily replicated by

competitors. These can be achieved by creating unique and innovative features or technologies that
are protected by patents or intellectual property rights. By establishing barriers to imitation,
companies can maintain their competitive advantage for a longer period.

2. Cost advantage in differentiating: Sustainable differentiation should not come at the cost of
profitability. A business must ensure that its differentiation strategy allows it to maintain a cost
advantage over competitors. This will help the business sustain its unique position in the market
without compromising on profitability.

3. Differentiation through multiple sources: Relying on a single point of differentiation can be

risky as competitors can easily imitate it. Sustainable differentiation requires businesses to have
multiple sources of uniqueness. This way, even if one source is imitated, there are others that can still
differentiate the business from its competitors.

4. Creating switching costs: Sustainable differentiation should create switching costs for customers.
By offering unique features or benefits, businesses can make it difficult for customers to switch to
competitors. This creates a loyal customer base and ensures long-term sustainability.

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