Here is a compilation of essays on the ‘Competitive Advantage of a Firm’ for class 11 and 12. Find paragraphs, long and short essays on the ‘Competitive Advantage of a Firm’ especially written for college and management students.
- Essay on Developing Competitive Advantage of a Firm
- Essay on Strategic Segmentation and Positioning of a Firm
- Essay on Outpacing Strategy of a Firm
- Essay on the Growth Directions-Existing Business of a Firm
- Essay on the Market Evolution and Strategic Moves of a Firm
- Essay on the Strategy of the Market Pioneer and Defender of a Firm
- Essay on the Strategy of the Attacker or Market Challenger of a Firm
- Essay on the Importance of Brands of a Firm
- Essay on the Importance of Distribution Network of a Firm
Essay # 1. Developing Competitive Advantage of a Firm:
Identification of strategies capable of giving a competitive advantage can be done through the following three steps, viz.:
(a) Defining industry boundaries and learning the rules of the game;
(b) Identification of possible competitive moves, duly linking them to the industry life cycle and the moves of other competitors;
(c) Choosing the right generic strategy, duly taking into account a sequence of competitive moves.
Defining what constitutes an industry is the first step towards identifying competitive advantages. The definition of industry need not be confined to the products or processes served by a company. The emphasis has to be on first identifying the expectations of the market and then determining the chain of activities-moving from product design to product utilisation-that meet such expectations.
One needs to have a broad perspective in order to identify the entire value chain or business system that surrounds the specific products or services offered by the firm. Such an understanding will indicate where and how the firm stands in the competition across the value chain or business system that provides the ultimate benefit to the customer.
A knowledge of how firms compete-by creating a higher perceived value and lowering costs-is an essential requirement for deciding what actions should be taken to produce competitive advantages. More specifically, tracking the competitors’ ability to coordinate and leverage their key resources viz., people, technology and money-across the entire value chain or business system to deliver the final product at the lowest delivered cost is a key input required by a firm to develop its strategy and create competitive advantages.
It is also important to find the extent of value addition being made by firms in the upstream (such as suppliers of raw materials, design, etc.) and downstream (such as distributors and retailers) categories of the extended value chain, and evaluate whether the system as a whole (including the extended part of the value chain as just defined) is working coherently to create the highest perceived value for the customers at the lowest delivered cost.
Needless to say, an understanding of what the customer wants (Le., the highest perceived value or lowest delivered cost) is vital. Otherwise, a firm may find itself in a situation where it is trying to compete in a market where the lowest delivered cost is expected with a business system that is geared to produce the highest perceived value.
Superior profit can accrue to a firm if:
(i) one or more of the activities of the value chain/ business system have a clear superiority in terms of performance vis-a-vis the competition; and
(ii) all the activities in the extended value chain (i.e., including those performed by suppliers and distributors, who are legally separate entities) are creatively and innovatively synchronized in a cost-effective manner.
When these two conditions are satisfied, there will be superior value creation at the lowest delivered cost.
However, the extent to which this ideal combination can be achieved depends on the stage of industry development. Typically, if an industry is an emerging one-like the PC industry in the early 80s-creation of the highest perceived value through product innovation and development will be a key concern initially.
However, after the product has been standardised and the market has expanded, the emphasis will shift towards minimising the cost base. During this stage, prices are used strategically to build a market share, and the low cost base facilitates that process. After sometime, when all the competitors have developed by and large the same low cost base, and the competition has intensified, an opportunity comes up once again for the enterprising firm to launch new products and services.
It can take advantage of industrial evolution to meet newer needs of the customers, and in the process shift the emphasis back to creating the high perceived value. A fresh interest in enhancing the perceived value of a product leads to greater attention to the development of new products, over and above ensuring the efficiency of the entire process. As an industry matures, this twin thrust on product differentiation and innovation on the one hand and constant attention to process efficiency improvement and cost reduction on the other is a must for the continued success of a firm.
While deciding on the areas where a firm should try to create competitive advantages, duly taking into account the stage of industry’s evolution as referred to above-it is important to track the actions of the key competitors-particularly those who belong to the same strategic group. Industry life cycle and evolution get affected not only by technological progresses and changes in customer preferences, but also by the initiatives taken by the competitors.
The list of competitors’ activities which needs monitoring includes such areas as; how are the competitors coordinating various activities of their value chain/business systems to create competitive advantages; and on which aspects are they placing more emphasis to create the positioning they want.
Once these details of each competitor belonging to different strategic groups within the same industry are known, it is possible to determine:
(i) Which competitors should be confronted or avoided;
(ii) What advantages are the target competitors creating that the firm is unable to create; and
(iii) What kind of competitive position should the firm aim to achieve, given the status of the industry life cycle and the initiatives of the competitors belonging to the same strategy group as that of the firm.
Essay # 2. Strategic Segmentation and Positioning of a Firm:
The effectiveness of a business-level strategy depends to a large extent on:
(i) How the segmentation has been made; and
(ii) Which specific segments have been targeted.
It is well known that on whatever basis a firm chooses to segment its market, the same must satisfy five key criteria, viz., it should be homogeneous, identifiable, profitable, accessible and actionable. So far as the choice of specific segments is concerned, the key criteria are; segment size, growth prospect, current and future profitability, current and future competition, and finally, the availability of competencies to operate in that segment.
The ability to create the highest perceived value at the lowest delivered cost should be the ultimate criterion for selecting specific segment(s). While a firm can choose to adopt either a broad scope or a narrow focus, depending on what positioning it wishes to seek, it is finally the ability to create the highest perceived value at the lowest delivered cost in each chosen segment, vis-a-vis the competition, which will distinguish success from failure.
When a firm examines which segments to focus on, it is useful for it to explore the sources of growth for each specific product-market sector.
In general, the growth of a market can be speeded up in at least three ways, viz.:
(i) Higher revenue from existing customers;
(ii) Creating new segments; and
(iii) Offering incentives to the non-users of the existing segments to opt for the products or services being offered.
Generation of higher revenue can be augmented by finding new uses, encouraging the existing customers to increase the frequency of use, and also trading up. Creation of new segments will include such actions as the entry into new geographical territories and the use of different kinds of distribution channels to spread the use of the products or services.
Conversion of non-users will require a significant increase in awareness and incentives to try the new products and services. As understanding of these various sources of market growth can give a firm an idea about the steps to be taken to enhance its own market position in the segments being chosen for future initiatives.
Having taken a decision on the segments to be targeted using the criteria and other issues, a key consideration will be to create differential advantages, thereby giving the firm the status of a preferred supplier.
In order to ensure sustainability of the advantages being aimed at, these criteria must be met:
a. The customers will perceive the difference significantly and distinctly; the advantage is unique;
b. It is sustainable; and
c. It is profitable.
The difference between a firm’s offering and the competitors’ offerings should be substantial enough to create net value for the customer, in case it decides to opt for the firm’s products and services. Here value is defined as the ‘utility’ desired by the customer, less all cost and non-cost expenses incurred by him/her to procure the product or service.
If the difference is positive, then the firm will have a differential advantage. However, such differential advantages have to be profitable, implying that the price paid by the customer should be in excess of the delivered cost.
Given this perspective, the firm will have three options for creating a sustainable competitive advantage:
i. Increase the ‘utility’ of products and services without disproportionate increases in the cost of producing and delivering the same;
ii. Decrease the cost of delivered products or services without lowering the utility;
iii. Find a new positioning in the market with a new combination of utility, price and cost.
The factors that can drive up the utility of a product or service can be classified into four categories, viz.:
(a) Product drivers consisting of such things as performance, features, reliability, conformance, durability, operating costs (as incurred by the customers), serviceability and aesthetics;
(b) Service drivers consisting of credit and finance, ordering facilities, convenience in procurement, speed of delivery, installation, training and consultation, pre- and post-sales service, guarantees and operational support (to help customers use the product or service);
(c) Company personnel capable of providing high quality services- can create a differential advantage which is not easy to imitate.
The key attributes of company personnel that can add value during interaction with customers are:
(iv) Reliability, and
(d) Image drivers, such as brand or reputation, that give a customer the confidence to use the product.
The factors that can drive the costs up or down, vis-a-vis the competitors, are:
(a) Economies of scale;
(b) Experience curve effect;
(c) Extent of capacity utilisation;
(d) Extent of collaboration and coordination among various activities of the value chain (leading to the creation of more value and lower costs);
(e) Quality of vertical integration;
(f) Timing of entry (the first mover has certain cost advantages);
(g) Location (certain locations have more inherent cost advantages than others);
(h) Institutional factors (e.g., tax rates, percentage of indigenous con tent in final product, attitudes and activities of the trade union towards productivity, efficiency and customer service, etc.);
(i) Strategic thrust (for example, if the firm aims to enhance the utility factors or plans to add new features, the cost will go up).
Given the above framework for determining which segments to focus on and for identifying the options available for creating differential advantages, the firm needs to decide what positioning it should aim to achieve. By positioning, we mean a conscious choice of a differential advantage (which is a particular combination of the utility or value received by the customers, the prices charged by the firm, and the delivered cost incurred by it to create the said utility or value) that is unique and sustainable and is aimed at exploiting a specific segment (or segments) being targeted.
Since each product-market posture normally has four distinct segments, viz. economy, mass market, premium and luxury segments, the firm needs to take a strategic view of which segment (or segments) to be targeted and what should be the scope or offering that will give the firm differential advantages vis-a-vis its competitors. The right combination of perceived value, price and delivered cost will have to be worked out to position a company’s products and services in one or more of these market segments.
The positioning decision is thus a strategic task of business-level management. The task has become more complex over the years as there are now a plethora of products and services, and the customers are well aware of the various choices available, thanks to the tremendous proliferation in the print and electronic media. Coupled with these are the ever-accelerating changes which are having an impact on both people as well as corporations everywhere.
Given these complexities, positioning is a must for long-term survival. Every company and its products or services must be perceived to be offering something that is unique and that adds value to the customer. The firm has to occupy a distinct position in the perceptual space of the prospects belonging to the segments being targeted. Positioning, once achieved, is not a static concept.
As Trout said, opportunities for repositioning have to be explored continuously against the background of changing customer attitudes, rapid progresses in technology, increased competitive initiatives and a growing mismatch between the long-standing perception of products and features being offered at a point of time. In today’s hostile market, characterised by such variability’s, no positioning is safe for all times to come, and hence, the same needs continuous assessment with a view to repositioning the firm on the basis of a new set of differential advantages.
Essay # 3. Outpacing Strategy of a Firm:
At the business level, success accrues to those firms that are able to plan a series of moves that can take their businesses from one position to another, as per a predetermined plan. Outpacing strategies, which are broadly of two types, are developed to achieve this planned shift from one position to another.
Pre-Emptive strategy-one of the two outpacing strategies, and normally pursued by the industry leader-aims to shift industry life cycle from the introductory stage to the growth stage in order to ensure that no competitor develops a low cost position while the firm is concentrating on creating the highest perceived value.
The emphasis under this strategy is to:
(i) establish standards that meet the requirements of a large body of existing and potential customers (it can be done comparatively easily by firms which are perceived by the customers as suppliers of value added products during the introductory phase of the industry), and
(ii) undertake significant process improvements to enable a shift to the lowest delivered cost strategy (as soon as the standards are accepted).
Determining the timing to switch to the low-cost strategy is the key, since switching too early or too late can both be detrimental to the overall performance. Incidentally, such a preemptive strategy normally focuses on the mass market.
The second outpacing strategy, called proactive strategy, is developed after the industry has reached the maturity stage. Mainly implemented by followers, this strategy entails launch of products with a high perceived value in an otherwise mature industry by leveraging the solid low delivered cost position already built up. Unlike the preemptive strategy, the focus here is on finding niches where such new products or services will be valued more.
Both the outpacing strategies lead to a change in the rules of the game and give the firms initiating such strategies, key competitive advantages. To develop such strategies, one needs to take a dispassionate look at all the individual elements of the value chain/business system, identify and eliminate non-value-adding activities, and add new elements and features to the product/service offerings, which will lead to the enhancement of overall value at an acceptable cost.
Essay # 4. Growth Directions-Existing Business of a Firm:
For existing businesses, three of these have a major relevance for revenue enhancement and maximising profit potential.
(i) Market Penetration Strategies:
a) Increase market share,
b) Increase product usage,
c) Inset, and
d) New applications.
(ii) Product Development Strategies:
a) Product improvement,
b) Extension of product line, and
c) Introduction of new product for the same market.
(iii) Market Development Strategies:
a) Expand markets for existing products,
b) Geographic expansion,
c) Target new segments, and
d) Finding new uses of existing product.
Essay # 5. Market Evolution and Strategic Moves of a Firm:
(a) Emerging Phase:
A new market or opportunity opens up due to innovation. Such innovation can be in the form of a new product or a marketing concept that creates a totally new segment of customers, or it can be a process innovation that helps in reducing costs and augments availability. Whether an innovation will be a commercial success or not depends on how the customers perceive such an innovation vis- a-vis the current offerings, and also on whether or not the firm is able to create the new benefits economically.
Assuming that an innovation so achieved has certain distinct features which customers accept as favourable, sales will grow, though initially at a slow rate. For faster growth in sales, a firm has to break the barriers to adoption. This can be done if the performance advantages claimed are easily demonstrable, switching costs are low, chances of product failure are minimum, need for support from the supplier is minimal, and finally, the target customers have the resources to switch over to the new product.
When all of these happen, sales pick up, and the competition-which may have been weak initially-also starts building, up (one source of competition will be from the previous products or processes): The pioneer firm who is introducing the innovative product, can have some protection for some time due to such barriers as patents, lack of technical know-how on the part of competitors, lack of control on the sources of raw materials and supplies, shortages of venture capital, and general lethargy on the part of the management of competing firms to move fast. However, such barriers do not last long and the followers soon erode the pioneer’s temporary monopoly.
(b) Growth Phase:
This phase is characterised by a rapid growth in demand caused by the spread of information among a large body of potential customers; more standardisation; lower switching cost; and decline in prices (caused by the effect of the experience curve and economies of scale). If one looks at the rapid prospect of growth, the number of competitors also increases steeply during this phase; but the intensity of competition is felt only when the growth rate begins to slow down. Companies that fail to develop a strong market position (in terms of perceived value creation, right pricing and low delivered cost) at the initial stage experience a decline in market share and profitability.
(c) Maturity Phase:
During this phase, the thrust shifts towards enlisting non-users or creating new uses to maintain and increase the market share. The difficulty in developing new uses or finding new bases of differentiation tends to drive the product into a commodity status. As a result, the competition gets fiercely intense, and the gain of one company normally takes place at the expense of other players. Since all scale economies and experience curve effects have already been obtained in the previous two phases, the scope for cost reduction becomes extremely limited.
On top of this, considering the excess supply over demand and also the commodity status of the product, dealers begin to grow in terms of power. When all these happen, a shakeup of the marginal competitors takes place through mergers and acquisition, as well as liquidation, bankruptcies, etc. The remaining firms-a handful of major competitors-create entry barriers through brand equity, size, and the ability to retaliate sharply in case any newcomer enters the industry.
(d) Decline Phase:
This is the period when volumetric growth finally becomes stagnant and actually starts showing a decline. There is no new opportunity for the development of new customers or applications and substitute products have already established their superiority both from the point of view of value creation and delivered cost.
However, it is pertinent to mention that it can be a major mistake to designate a market as ‘dead ‘since there can still be several avenues to infuse growth in the market which looks stagnant otherwise. Managers need creativity, foresight and an urge to revitalise a product. There are many examples of how company after company lost the opportunity for rapid growth in specific product-market segments by deciding to quit certain businesses which were later revitalised through the imagination and foresight of other players.
Porter has suggested the following strategies for dealing with declining businesses:
i. Build market share through rationalising operations and acquiring existing firms, both of which will require fresh investments; can be quite risky unless the management is confident of recovering the investments made during the decline phase.
ii. Identify robust and price insensitive niches (it is unlikely that other competitors shall sit quietly and not attack such segments).
iii. Emphasise cash flow maximisation rather than the building of market share; concentrate on a harvesting strategy which shall include- cost cutting; raising prices; minimising discretionary expenditures, such as advertising and sales promotion, and R&D investments; and also, rationalising the products, customers and distribution channels.
iv. Divest the business at an appropriate time so that there is a net recovery of investments, and the buyer also finds it attractive to acquire the business-even at that stage.
The first three strategies assume that the firm will continue in the business for some more time- even though it is declining, while the fourth one will lead to its exiting from the industry. The four options can be considered more rationally if the management recognises the decline phase early.
Essay # 6. Strategy of the Market Pioneer and Defender of a Firm:
The market pioneer and the defenders have the following options to defend their market leadership:
(a) Take offensive postures, such as undertake an aggressive pace of innovation and new product introduction, adopt new technologies, pioneer new segments and distribution channels, etc., with a view to defend the present market position;
(b) Defend current products and markets through building fortifications around the same by way of aggressive advertising, pricing, etc.; it is not an useful strategy in these days of fast-changing technology and customer preferences;
(c) Protect the main product-market segments which are likely to be attacked by competition by building defensive outposts around the same; this is called flanking defence-a typical example is the launch of a fighter brand to protect the lead brand of the firm which is being threatened by a competitor’s aggressively-priced product;
(d) Defend preemptively, rather than through a reactive strategy such as ‘flanking defence, referred to in (d) above. The list of actions includes preemptive price cuts, building additional capacity, and providing other signals-all meant to discourage both new entrants as well as existing players from attacking the leader;
(e) Attack the competitors when they are the most vulnerable-be it due to an industrial relations problem, debt crisis, legal obligations, exit of key managers or plant breakdown. This is called a counteroffensive defence capability (also called ‘mobile defence’). The aim of such a strategy is to discourage the competitors in related technologies from eroding the existing customer base; and
(f) Withdraw from those areas where the firm lacks competitive advantages and refocus the resources to select a few areas where it has core competencies (also called ‘contraction defence’).
Essay # 7. Strategy of the Attacker or Market Challenger of a Firm:
The objective of an attacker or challenger is to wrest the market leadership from the pioneer or current leader. The task is not easy since a successful leader has the advantages of lower unit cost and brand equity as well as the resilient power to withstand competitive onslaughts.
However, even a successful pioneer has certain limitations, such as wrong positioning vis-a-vis current expectations and attributes of customers, technical flaws in products and services, the presence of outdated technologies, making products and processes uncompetitive, the prevalence of an inward-looking culture which is not geared to meet competitive pressures, and finally the limitation of resources to expand or grow at the right pace.
When the market leader or pioneer has such weaknesses, it becomes subject to attack by a challenger’ on at least two grounds:
(a) The inability of the pioneer/leader to identify new uses and new segments; the challenger exploits such a weakness by offering marginally different products at lower prices and using a different distribution channel; and
(b) The inability to develop new generation products with significantly different attributes; here also, the challenger develops additional attributes not only to open up new segments but also to make a dent in the existing product-market segments.
In order to attack the leader severely and comprehensively, the attacker can adopt one or more of the following strategies:
(a) Attack head-on and beat the leader in all aspects-product attributes, wider distribution, better customer service, alternative pricing, aggressive advertising and sales promotion, It is often called a frontal attack;
(b) Attack the leader in those areas where the latter is weak (called ‘flanking attack’), such as emerging market segments that the leader is not attending to, or the failure of the leader to identify new products with better attributes;
(c) Attack on several fronts at one time by bringing out a series of products and services, targeted at both the existing and new segments (including those not yet developed). The thrust is on attacking a number of new areas rather than the existing stronghold of the leader. This is also called an ‘encirclement attack’;
(d) A surprise attack in one or few areas, particularly in those cases where the attacker has resource limitations. This is called ‘guerilla attack’, the aim here is to eventually get a strong foothold in the market dominated by the leader; and
(e) Seek opportunities in related but newly emerging fields, or in new geographical markets that are not being exploited by the leader. Such a strategy, called ‘bypass attack’, avoids confronting the leader in its areas of strength.
Essay # 8. The Importance of Brands of a Firm:
The experience of Japanese companies during the late 70s and early 80s has shown the importance they have given to developing global brand leadership to dominate competitive battles. A successful brand, which acts as an entry barrier, not only meets the functional requirements of the consumers but also gives added value by meeting certain of their psychological needs. These added values, which create distinct impressions in the perceptual space of the consumers, can be measured by perceptual research on brand awareness (unlike product effectiveness, which is normally measured through blind product-use tests against competitors’ products).
Brand building can be of various types, such as company’s banner brand, product wise brand, combined company and product brand, or a set of brands for one group of products.
Whatever be the basis, it is important to understand the sources of brand value as listed below:
1. Experience of use (through familiarity and proven reliability),
2. User association,
3. Belief in efficacy,
4. Appearances, and
5. Name and reputation of manufacturer or service provider.
The above understanding is crucial for building a brand-positioning strategy, which is really a plan of what image the brand should cultivate.
Development of a brand-positioning strategy generally follows a four-step process, viz:
(i) Attribute research,
(ii) Competitor research,
(iii) Gap analysis (to determine if there are ‘gaps’ or attractive positions not yet attended to by competitors), and
(iv) Concept testing.
While developing the positioning strategy, a company must understand clearly that there can be at least four layers of brand image, viz.:
(i) core product which meets the functional requirements;
(ii) basic brand upon which key differentiation (with competitor’s brands) and brand personality are built;
(iii) augmented brand (consisting of (i) and (ii) as well as pre- and post-sales services, guarantees and financial support); and
(iv) potential brand (which is achieved when the added values are so strong that the customers will not accept substitutes easily, even if the same are cheaper or widely available-some examples are brands like Coca-Cola, Kellog, Kodak, etc.). When these four levels of brand image are developed successfully, the firm begins to enjoy a dominant share in the segments it is operating and command better prices, even when strong competitive products or services are available.
Multibranding and brand extensions are important components of the overall branding strategy. Multibranding occurs when a firm introduces several brands into the same broad market (such as P&G’s Ariel, Daz, Fairy Liquid and Pamper). The main reason for multibranding are an increasing segmentation of the market, availability of differentiated distribution channels and the development of new advertising and promotion media-each of which provide stimuli for such multibranding.
There can be two types of multibranding, viz., horizontal (which aims at differentiating distribution channels rather than consumers), and vertical (which targets different consumer groups with same or different distribution channels-an example is Toyota’s Lexus brand). A well thought out multibrand strategy, along with innovation and creative market segmentation, is now regarded as an integral part of any successful competitive strategy.
Brand extension strategy uses an already successful brand to enter into a new segment within the overall broad market. Brand stretching is another version of brand extension and is resorted to for tapping different market segments (for example, the name Yamaha is given to music systems, hi- fi products and skis).
The present-day trend is more towards developing brand extensions, banner or umbrella brands, and also the use of a company’s name in front of individual products (e.g., Coca-Cola, Sony, Hitachi, IBM, etc.). Of particular strategic importance is the development of a strong global or banner brand that can give a head start to the firm in its race to the future.
Even though it will cost a lot initially to build a strong brand that would be capable of getting a significant share of prospect’s minds over a large geographical area, the cost of subsequent introduction of new products will be comparatively very low (as has been the experience of Japanese companies, like Sony, Sanyo or National Panasonic).
Such banner brands give instant credibility to new products, and customers feel comfortable while transferring their goodwill as well as previous experiences to such new products. Hamel and Prahalad have provided an alternative concept of an organisation with a diversified product-mix and stated that while core competencies provide the basic foundation for product and business leadership, a banner brand acts as the roof within which such products and businesses flourish.
The banner brand need not be the corporate brand, and hence, there can be more than one banner brand. The banner brand and product-specific brands need not be mutually exclusive.
As suggested by HAMMEL and Prahalad the key attributes of a banner brand are:
(i) Recognition (i.e., level of awareness),
(ii) Reputation (i.e., performance will be same as what is claimed),
(iii) Affinity (i.e., how close the brand is to the customers’ sense of self), and
(iv) Domain (i.e., the breadth of the banner brand in terms of product scope covered or to be covered).
Together, these four attributes determine a brand’s share of mind:
A key task of business level management is to review brand performance on a regular basis and initiate actions, as may be needed, to revitalise and reposition various brands. Revitalisation could mean finding new markets, entering new segments, developing new applications and incentivising higher usage.
Repositioning is a more difficult task and consists of one or more of such steps as:
(i) Continuing investment in products underlying the brand in terms of latest technology, value, attributes and fashion;
(ii) Seeking a change in the buyers’ beliefs towards a product’s competitiveness and utility;
(iii) Depositioning of competitors’ products by seeking to alter the customers’ belief in such products;
(iv) Stressing certain aspects or value of the brand, hitherto not paid attention to by the customers;
(v) Persuading customers to change preferences while buying products (like switch from low cost to high quality, high value-added products);
(vi) Adding supplementary services to augment the brand.
There are two ways in which a company can develop brands, viz., it can build the same in-house or it can acquire them. Internal development of brands can be risky, slow and expensive, while acquisition can be a faster route. Which route will be better for a company depends on the particular circumstance, but normally acquisition is preferred if the growth prospect of the industry is not high, the market is mature and the existing brands already have a dominant share.
The relative cost of acquiring certain specific brands can be quite attractive if the companies holding such brands are not well-managed, and hence, are not able to maximise shareholder value. From the buyer’s point of view, acquisition works best if there is an urgent need to build a share in a market that is fiercely competitive and if there is going to be a synergy-be it in terms of operations, purchase, distribution or technology, between the existing and acquired brands. In growth markets, however, a company can undertake brand-building activities, if it has inherent strengths and resources in all the key functional areas.
Essay # 9. Importance of Distribution Network of a Firm:
Like brands, an effective distribution network gives a firm distinct competitive advantages over its competitors. Designing the right distribution network and determining channel objectives and strategy are important strategic decisions at the business level. A careful consideration of options available, such as intensive distribution (suitable mainly for low-priced, convenience and impulse products), exclusive distribution (suitable for high priced, luxury products), or selective distribution (applicable to speciality products), is needed to take a decision on the channel design.
The channel should be capable of reaching the target markets and must have the required personnel and distribution facility. It should also be able to explain the differential advantages of a manufacturers’ products vis-a-vis that of the competitors and facilitate the realisation of such differential advantages.
Also important are considerations, such as whether there is a possibility of conflict of objectives between the manufacturer and the intermediaries, and to what extent controls reside in the hands of the former or the latter. The ability to exercise control on the intermediaries depends to a great extent on the manufacturer’s reputation for quality and delivery, brand equity as well as customers’ preference for its products or services.
The options open to a firm in designing the distribution channel are, basically:
(i) Direct marketing (Le., direct selling to consumers, without having one’s own sales force by using extensive advertisement, telephone, mail or catalogues; and sending goods through mail or delivery service);
(ii) Developing one’s own sales force;
(iii) The use of an intermediary marketing channel.
A firm can use one or more of these options to make the product available to ultimate consumers.
Which options shall suit best depends on a number of factors, such as:
(i) Product characteristics (perishability, ease of handling, delicacy, technical sophistication, etc.);
(ii) Customer location and diversity;
(iii) Channel objectives and strategy;
(iv) Channel reliability, etc.
What is strategic in channel decision is to invest quite early in the same as in the case of brand building or acquisition-in order to reach the ultimate customers as well as to exercise control on the movement of the product. Failure to have the desired control as well as widespread reach can undermine a firm’s efforts to drive to the future.
A strong distribution network offering differential advantages not only enables a firm to enjoy competitive advantages, but it also gives the firm an opportunity to leverage the channel by pushing through more and more new products across the same. Japanese companies-which showed exemplary marketing orientation in developing a strong brand equity quite early-also invested heavily in building their distribution network, which they later leveraged by pushing a large number of new products through the same. In these days of global competition, global distribution along with global brands is an absolute necessity for market success.