Summary
Competitiveness is now a top business objective. On the ability of the company to adapt to market demands with increasingly higher value-added productions, depending on differentiation or cost, it depends on whether it maintains and grows its participation in the environment in which it operates.
The value chain and process mapping are two approaches to managerial analysis that complement and enrich each other. Both one and the other facilitate the vision and perspective of an organization or a product and the interrelationships that exist or should exist based on solving a problem or improving the results of the internal operation with an external vision.
Introduction
Currently, the prevailing conditions in the business environment, both nationally and internationally, have forced the vast majority of Cuban companies to seek solutions that allow them to face the challenges that this implies.
In this sense, the Business Improvement process has constituted, for Cuban companies, a starting point in work for efficiency and profitability, laying the foundations for new styles of work and management.
Derived from the main implications of this process, it is necessary for companies to carry out their management in such a way that they satisfy the needs and expectations of customers in order to link the market to their offer. Starting from this premise, the knowledge of all those elements that intervene in and influence their economic process begins to be a concern of companies.
For the design of concrete strategies that allow for a more efficient process, it is essential that the competitive advantages that the company possesses are known exactly, since they will determine the course of the path to take.
The search for competitiveness
To face the term competitiveness in the most accurate way possible, it is necessary to delve into those elements that have intervened in its conception and in the advances that the economy has had and the entire system of laws and regularities that govern it.
Starting in the 1970s, the Americans were forced to revise their concepts of administrative management: the energy crisis, the economic stagnation and the business victories of the Japanese and Germans put in check even the considered giants of this economy, since the entire electronics industry. Since then, concepts such as strategic planning, total quality, reengineering and competitive advantage have not been absent from economic management processes.
Under these conditions, the thought and contributions of the classics constitute the basis for the creation of concepts and an entire theoretical base that allows us to deepen and better understand certain economic processes.
As for the competitiveness analysis, it cannot be discussed without referring to the contributions of Michael Porter, who have also helped to understand how the micro and macroeconomic dimensions complement each other to generate competitive conditions. They have also allowed us to understand how a set of economic and institutional phenomena that work in both the countries' economies and in companies interrelate, to stimulate or discourage competitiveness.
A competitiveness analysis aims to identify the type of competitive advantage that a company or product has and to assess to what extent this advantage is defensible, considering the competitive situation, the relationships of existing forces and the positions occupied by competitors.
What, then, is a competitive advantage?
Competitive advantage is understood as all the characteristics or attributes of a product or service that give it a certain superiority over its immediate competitors. These characteristics or attributes can be varied in nature and refer to the same product or service, the necessary or added services that accompany the base service, or the production, distribution or sale modalities of the product or the company.
This superiority is, therefore, a relative superiority established in reference to the best placed competitor and can result from a multiplicity of factors. In general, these factors can be grouped into two broad categories according to the origin of the competitive advantage they provide. Competitive advantage can be external or internal.
A competitive advantage is called "external" when it rests on one of the distinctive qualities of the product that constitutes a value for the buyer, which can be achieved by reducing its use costs or by increasing its use performance.
This type of competitive advantage gives the company a certain market power in the sense that it is in a position to make the market accept a higher sales price than its closest competitor, which does not have the same distinctive quality. This brings with it the possibilities for adopting a differentiation strategy.
A competitive advantage is "internal" when it is based on a superiority of the company in the domain of the costs of manufacturing, administration or management of the product or service, and thus provide value to the producer, thus providing a unit cost. less than the closest competitor.
An internal competitive advantage is the result of better productivity and therefore gives the company better profitability and greater ability to resist a reduction in the sales price imposed by market conditions. It brings with it a strategy of domination through costs, which highlights the organizational and technological know-how of the company.
It has been shown that the competitiveness of the company obviously reflects the successful management practices of its executives, but also the strength and efficiency of aspects such as the productive structure of the national economy, long-term trends in the rate and structure of investments. in capital, the scientific and technological infrastructure and other "externalities" from which the company can benefit. Thus, it has been possible to understand, for example, why certain companies and certain productive sectors innovate more than their competitors, or why they have their base of operation in one country and not in another.
The role of the location of companies in the generation of competitive advantages has been changing radically in the current time of accelerated globalization of the world economy. Until recently, the locations of the most successful companies in the international market were considered to be those in which they could minimize their costs advantageously compared to their competitors.
This close correlation between the geographical location of companies and their competitiveness has been deepening with the advancement of global trends in accelerated globalization. However, economic geography in many parts of the world is still in a state of transition. The relaxation of trade and investment barriers is incomplete and is still comparatively recent in many countries.
Although there is not a full consensus around all of Porter's reflections, the theorists agree on something basic: competitiveness, total quality, reengineering, organizational development, strategic planning and administration, etc., are geared towards creating a competitive advantage: to conquer in the perception of a market leads to the conviction that the company offers the best value for money.
Another important aspect in a competitiveness analysis is that of decisions about the fixed assets that must be acquired, since these will determine the nature of the operations and products of a company during the future years, especially since investments in fixed assets are usually long-term and cannot be easily changed. From these investments, strategic decisions are derived on what services or products will be offered or sold, in which markets it will compete. How the company chooses to finance its operations (the capital structure problem) and how to manage its short-term operating activities (the working capital problem) are important aspects, but fixed assets define the business of the company..
The most visible thing about fixed assets is that they make the operation of the company possible, but substantially their choice decisively reflects the strategic talent (in other words, the ability to obtain competitive advantages) of the organization.
Competition is at the center of business success or failure. Competition determines which activities of a company can contribute to its performance, such as innovations, a cohesive culture or a good implementation. Competitive strategy is the search for a favorable competitive position in an industrial sector, the fundamental arena in which competition occurs. Competitive strategy seeks to establish a profitable and sustainable position against the forces that determine competition in the industrial sector.
Therefore, competitiveness is not the product of chance nor does it arise spontaneously; It is created and achieved through a long process of learning and negotiation by representative collective groups that configure the dynamics of organizational behavior, such as shareholders, managers, employees, creditors, clients, by competition and the market, and finally, the government and society in general.
An organization, whatever its activity, if it wishes to maintain an adequate level of competitiveness in the long term, must use formal analysis and decision procedures sooner or later, within the framework of the "strategic planning" process. The function of this process is to systematize and coordinate all the efforts of the units that make up the organization aimed at maximizing overall efficiency.
Determinants of business competitiveness
Factors that can determine business growth and survival include integration, diversification, cost leadership, and the experience effect.
The design of marketing strategies, so fundamental to the achievement of efficient management, is also based on these factors, and they are what will essentially determine the design of the company's marketing mix, that is, its offer.
Integration is a strategy that companies adopt to ensure supply, or to control a distribution network. This phenomenon occurs mainly in markets with an oligopoly situation, that is, when there are many competitors and only a few detect the highest percentage of total sales.
In order to demonstrate that this strategy is part of business survival and growth, three types of integration can be cited:
- Upward integration. It is about protecting a strategically important source of supply. Downward integration. Its objective is to ensure the control of the output of products, decisive for the performance of the company. For example, a consumer goods company will try to ensure control of distribution through exclusive contracts and by developing a network of its own stores, etc. Horizontal integration. The objective is to reinforce the position, the competitiveness, absorbing or controlling some competitors.
Diversification. This strategy is justified if the industrial sector where the company is immersed does not present any or very little opportunity for growth or profitability, either because the competition occupies too strong a position or because the reference market is in decline.
As in the case of integration, three types of diversification can be considered: concentric diversification strategy, pure diversification strategy and conglomerate diversification.
- Concentric diversification: Consists of the company in its industrial and commercial sector, seeking to add new activities, complementary to the activities on the technological and / or commercial level. its traditional activities, both technologically and commercially. Cluster Diversification: This strategy is usually produced by a process of external growth, through absorptions and mergers rather than internal growth.
Cost leadership and the experience effect. The competitive advantage that a company holds acquires its market power, not only by the presence of a differentiating element, but also by the eventual presence of a difference in unit costs. Workers increasingly specialize, gain more experience, do better things; consequently costs go down.
Total Quality as a source of Competitiveness
The world is experiencing a process of accelerated change and global competitiveness in an increasingly liberal economy, a framework that requires a total change of focus in the management of organizations.
In this stage of change, companies seek to increase productivity rates, achieve greater efficiency and provide quality service, which is forcing managers to adopt participatory management models, taking the human element as the central basis, developing teamwork, to achieve competitiveness and respond in an ideal way to the growing demand for optimal quality products and services at all levels, being increasingly efficient, fast and with higher quality.
Total quality is a concept, a philosophy, a strategy, a model of doing business and is focused on the customer.
It can be concluded then that competitiveness is the ability of a public or private organization, profit or not, to systematically maintain competitive advantages that allow it to reach, sustain and improve a certain position in the socio-economic environment. This concept of competitiveness implies the idea "excellence", that is, with characteristics of efficiency and effectiveness of the organization, only possible with adequate strategic planning in the company and in each of the functional subsystems that comprise it.
Analysis tools and business management based on competitiveness
From the business perspective, there are different instruments and methods that allow evaluating, analyzing and forecasting the behavior of an organization. For the analysis of competitiveness in the business field, the methodology and instruments are extensive.
The following are those that are most relevant due to the practical application they have and the strategic implications derived from them for achieving a favorable competitive situation and success in general.
A) Notion of competitive advantage
The analysis of the notion of competitive advantage allows the company under analysis to evaluate itself against its highest priority competitor (CMP) to extract the strategic implications that allow it to take advantage of the results of this comparison.
The graph in figure # 1 reflects these two dimensions of competitive advantage that can be expressed through the following two questions:
- Market power: how does the price of the company under analysis compare with the maximum sales price acceptable to the market, in relation to the priority competitor? Productivity: how does the unit cost of the company under analysis compare? relative to the priority competitor?
The main strategic implications derived from this type of analysis are the following:
- A positioning in the upper left and lower right quadrants are extreme, disastrous and ideal respectively; a positioning in the lower left quadrant implies a strategy of domination through costs;
Figure # 1: Notion of competitive advantage. Source: Strategic Marketing. Page 225. CMP: Highest priority competitor.
- A positioning in the upper right quadrant leads to a differentiation strategy; the bisector delimits the favorable and unfavorable zones.
The objective of the competitiveness analysis is to allow the company to be located in these axes and to extract the strategic implications and the priority objectives.
From this analysis it can be pointed out that there are two basic types of competitive advantage that a company may possess: low costs or differentiation. The importance of any strength or weakness that a company possesses is, in essence, a function of its impact on relative cost or differentiation.
When analyzing each disaggregated activity, account must be taken of what represents value for the client, discarding, or reducing the importance of those whose contribution is not significant in value for the client.
B) The Cost Advantage and the Experience Effect
The competitive advantage detected by a company acquires its market power not only due to the presence of differentiation elements, but also due to the eventual presence of a difference in unit cost in relation to its direct competitors due to better productivity.
In sectors with high labor intensity, that is, where the added value is high, a reduction in costs corresponding to the added value is observed as the company accumulates experience in manufacturing the product. This reduction comes from the fact that workers improve their working methods, the company adopts new manufacturing processes, perfects the concept of the product, etc.
The existence of this learning process was verified by the team of the Boston Consulting Group (BCG) and they established the law known as the law of experience.
This assumes that the term experience designates the accumulated volume of production, so that growth of production by periods should not be confused with growth of experience.
This law is not a natural law and is therefore not inevitable, it is a law of observation. Costs do not drop more than when they are lowered, making it a voluntarist law; in addition, the experience effect rests solely on the added value costs, that is, those over which the company exercises control (transformation, assembly, distribution and service).
It should also be noted that for the purposes of this law, costs must be measured in constant monetary units since inflation can mask the experience effect. On the other hand, this effect is always stronger in the start-up and growth phase of the development cycle of a new product, the subsequent improvements are proportionally minor.
The strategic implications of the law of experience are based on the reduction of the costs that the company has over those of its competitors, which will allow it to grow faster obtaining a growth in relative market share. This supposes the adoption of aggressive commercial policies in terms of sale price. However, many times the best strategy is to transform a fragmented activity into a volume or specialization activity.
From a marketing perspective, the Boston Consulting Group identifies the following types of industries according to the number of possible ideas of competitive advantage:
- Volume industries: those in which companies can obtain only a few competitive advantages, but of great importance. In this case, profitability is positively correlated with the size of the company and its market share. Stagnant industries: these are industries with few competitive advantages, each of which is very small. Here companies can try to have better sellers, more frequent promotions, that is, make more aggressive use of marketing tools, but all of these will be small advantages because profitability is little related to market penetration. Fragmented industries: they are those in which companies can find many opportunities for differentiation but which are not very important. In this case, profitability is not related to the size of the company. Specialization industries: are those in which the companies that comprise it find many opportunities for differentiation and each one has a high probability of profitability. In these types of industries, small businesses can be as profitable as large ones.
That is why it is of enormous importance that managers know how to distinguish what type of industry the company they represent belongs to, since this will facilitate the design of the strategies and will help in the definition of the tools that must be used to differentiate their supply of according to the type of competitive advantage detected. But it is necessary to be careful, since in situations of industrial stagnation, as in volume activities; there are few ways to differentiate yourself from competitors, and many times accumulated experience does not constitute a competitive advantage. On the contrary, they are sometimes the newcomers, who having invested more recently, have the most advanced technology that allows them to carry out more efficient production.
Another competitiveness analysis instrument is the Value Chain, which will be discussed in more detail below.
Value Chain and Generic Strategies
Michael Porter proposed the concept of "value chain" to identify ways to generate more benefit for the consumer and thereby gain competitive advantage. The concept lies in making the greatest effort to achieve the fluidity of the central processes of the company, which implies a functional interrelation that is based on cooperation.
Among the central processes are:
- Realization of new products. Inventory management (raw materials and finished products in the right places and at the right time) Processing of orders and delivery. Customer service.
For Porter, the goals indicate what a business unit intends to achieve; the strategy responds to how to achieve them. The most used instrument to carry out an analysis that allows to extract clear strategic implications for the improvement of activities with an efficiency and effectiveness approach is the Value Chain.
The Value Chain as an internal analysis instrument
Based on the assumption that buyers choose the offer that gives them the highest net value received, how can companies identify the sources of value that give them a competitive advantage? To this end, Porter proposes the value chain, which constitutes a valuable internal analysis tool.
The value chain is made up of all the activities that a company must carry out to carry out a product or service. All these activities suppose a cost for the company and if the buyer is willing to pay a higher price than this cost for said product or service, then the company will obtain a certain margin or profit.
The activities that make up the value chain can be grouped into two large groups:
- Primary activities Support activities
The first are those that make up the company's production cycle, that is, factor inputs or internal logistics, production processes, product outputs or external logistics, marketing activities and after-sales service.
The second are activities that make it possible to carry out the primary activities and that allow the operation of the company. Within the support activities, infrastructure, human resources, technology development and provisioning activities can be distinguished.
The primary activities include the following activities:
- Inputs or internal logistics, which cover all the activities necessary to carry out the receipt of factors, their storage, inventory control and material handling until the start of manufacturing. A proper knowledge of all these processes and their control are necessary to know what factors are influencing them negatively or positively, so that they allow the adoption of measures and the concentration of resources (material, human or financial) to eliminate existing weaknesses, as well as identifying the strengths that exist and that can become a source of competitive advantage. Operations or production process, which includes activities aimed at obtaining the ideal conditions of quality, time and cost of products finished.In this sense, it is decisive that the production process is known in greater depth and accuracy, so that the finished production meets the customer's demands and expectations. For this, it is necessary to establish and ensure compliance with the rules for the consumption of resources, to have an appropriate quality policy and to comply with it, that the human resources involved in these operations are fit for their functions within of process. All this must be aimed at achieving an increasingly efficient and effective production that allows a competitive position of the company in the market.Outputs or external logistics, which corresponds to the storage activities of finished products and their subsequent physical distribution.In order to guarantee that the offer arrives in the ideal conditions to the final customer, the storage functions must provide security and rigorous compliance with the requirements established according to the type of product to avoid deterioration or loss that threatens quality or quantity. For this, it is necessary to have the necessary conditions and ensure the effective development of this activity. Regarding the distribution function, one must be careful in the selection of the channel, it must be designed in such a way that the transportation costs are within the acceptable limits for the company and that it meets the client's time expectations. An efficient operation of these functions can be the basis for a source of competitive advantage, not only for the company, but also for the customer.Marketing and the activities of this functional area. Despite the fact that this is an activity that was not given due importance in the Cuban business system, the prevailing conditions in the environment have provided a stimulus for its implementation and incipient development. The Business Improvement process laid the foundations for this activity, defining the basic functions that must be carried out in this subsystem, and not on a whim or by chance. The study of the environment, the detection of market opportunities and the main threats that the company must face are the starting point for designing strategies at different levels;An internal analysis carried out with a marketing approach allows us to detect the strengths that the company has to take advantage of opportunities and face threats, and which may also be future competitive advantages in which to support the strategies and tactics necessary to accomplish the mission.. The design of the marketing mix also depends on this activity, which is nothing more than an effective design of the variables controllable by the company, which implies the definition of strategies on the product and the tools that must be used to achieve differentiation. of the offer, definition or proposal to higher organizations of programs on prices, the design and the choice of the appropriate distribution channel,both for the company and for the client and the way in which the different tools of the communication variable will be used to achieve the desired positioning. After-sales service or service; which are the activities necessary to maintain the conditions of the product sold. After-sales services are also a very useful tool to obtain a distinction in the company's offer over its competitors. If they are well used they can provide an advantageous position that involves the loyalty of current customers and a stimulus for potential customers.a very useful tool to obtain a distinction in the company's offer over its competitors. If they are well used they can provide an advantageous position that involves the loyalty of current customers and a stimulus for potential customers.a very useful tool to obtain a distinction in the company's offer over its competitors. If they are well used they can provide an advantageous position that involves the loyalty of current clients and a stimulus for potential ones.
The company's task is to assess the costs and performance of each value-creating activity, as well as that of its competitors as a point of reference, to seek improvements. To the extent that the company performs an activity better than its competitors, it will achieve a competitive advantage.
But not all companies find many opportunities to cut costs or increase profits through gaining a competitive advantage. The solution, then, is to periodically identify new potential advantages to always obtain additional value over the competition.
In order for the so-called primary activities to be carried out effectively, it is necessary to carry out a series of tasks considered supportive. These include the following:
- The company's infrastructure includes all activities, usually grouped. These are: the direction or management, which carry out the formulation of strategies, planning and control; administrative processes; those of global quality management; organization, management, information and finance (which according to Porter should be included within infrastructure activities). In human resources management, recruitment, training, skills development, incentive systems, participation, promotion, promotion of the organizational climate, etc. In technology development, activities aimed at the acquisition and subsequent exploitation of technology are framed, on which the company will design its strategy.In the supply activities, reference is made to all the functions necessary to carry out the acquisition of all the factors required to develop the production process, be they product components or auxiliary elements.
The activities of the value chain are interrelated and the links between the way of carrying out an activity and its cost and the performance and cost of another activity are called links. This implies the repercussion of an activity and its cost on the other activities that are related to it. Knowledge of these links is important since they allow us to know the type of influence of one activity on others.
These links also reflect the need to coordinate activities to achieve a better functioning of the activities of the value chain, which translates into a source of competitive advantage.
The activities of the value chain are in turn connected to the value chains of suppliers and customers, with the vertical links reflecting those connections. The improvement or control of these links can be a source of competitive advantage, benefiting not only the company but also suppliers or customers; for example, the design of a distribution channel may favor a customer as she sees her own distribution system improved.
A detailed study of these links in terms of cost will allow the company to identify the links and activities that represent sources of competitive advantage, whether in cost or differentiation. It also allows to detect the activities that constitute weak points to act on them.
Throughout this internal analysis process through the value chain, the depth of the study can be achieved by dividing activities into more elementary activities until reaching the desired level of depth, compatible with the information that the information system can provide. of the company.
Once the value chain of the company has been analyzed and the main sources of competitive advantage have been detected, a strategy must be chosen that enables the mission to be fulfilled, also taking into account the evolution of the environment.
Porter states, on the basis of the detected competitive advantage, what are the basic strategies to consider whenever such competitive advantage is defensible, and that it will therefore be the point of support for subsequent strategic and tactical actions.
The basic strategies that can be adopted will be different on the basis of competitive advantage, which can either be based on a productivity gain, and therefore in terms of cost, or based on an element of differentiation and therefore in terms of price..
In this way, Porter considers that there are three main possible basic strategies against the competition according to the objective considered: the entire market or a specific segment; and depending on the nature of the company's competitive advantage: a cost advantage or an advantage due to the distinctive qualities of the product.
These strategies are:
- Leadership or domination through costs. (The business that achieves this is in the possibility of offering lower prices.) Differentiation. (The business is focused on achieving superior performance in some important aspect for the client.) Concentration. (The business is concentrated in one or several market segments and achieves cost leadership or differentiation.)
Cost Leadership Strategy
The central theme of this strategy is that the companies that choose it must focus all their efforts on keeping costs low in relation to their competitors, although this does not mean that they underestimate other areas such as quality and services, the central theme of the strategy of These companies is keeping costs low relative to their competitors. The low level of costs is a defense against the five competitive forces in various aspects.
The level of costs is a weapon with which the company can defend itself against its competitors since its low costs allow it to obtain benefits once its competitors have squandered theirs in rivalry for the market. A low cost position defends the company from the strongest buyers because buyers can only exercise their power to bring prices down to the next most efficient competitor level. The low cost level is also a defense to suppliers by providing more flexibility to deal with increases in the cost of inputs. Generally, the factors that lead to a low cost position also lead to the creation of barriers to entry in terms of economies of scale or cost advantages. Finally,A competitive position in costs normally positions the company favorably against substitute products from competitors in the sector.
Thus, a cost competitive position protects the company against the five competitive forces enunciated by Michael Porter because the price war will only continue to erode margins until those of the next most efficient competitor are eliminated, and because the least efficient competitors will be the first that will have to face the competitive pressures.
Naturally, cost leadership is not suitable for all companies. Porter argues that companies that pursue cost leadership as a strategy must have a high market share relative to their competitors, or they must have some other type of advantage, such as favorable access to raw materials. Products have to be designed so that they are easy to manufacture, and a company that wants to keep the cost level low will have to maintain a wide range of related products so that it can spread the costs across the entire product line and avoid that all the weight falls on the individual products. In addition, the company that maintains a low level of costs must have a wide portfolio of clients.You cannot target small markets or niche markets. Furthermore, once a company achieves cost leadership it must be able to generate high profit margins; And if you also manage to reinvest those benefits adequately by modernizing your equipment and facilities, you will be able to maintain your low cost position for a certain time.
Porter warned that there were certain disadvantages and dangers associated with cost leadership. Although high volume typically allows for cost reduction, savings are not automatic, and managers of cost-competitive companies must always be vigilant to ensure that the promised savings are indeed achieved. The managers have to be very attentive to the need to withdraw obsolete assets, to invest in technology and to manage the company always keeping in mind the level of costs. Finally, there is a danger that a newcomer or an old competitor will imitate the leader's technology or cost control methods and be ranked first. Cost leadership can be an effective response to competitive forces, but there is nothing certain.
Cost leadership is perhaps the clearest of the three generic strategies. In itself, a company aims to be the lowest cost product in its industrial sector. The company has a broad landscape and serves many segments of the industrial sector, and can still operate in related industrial sectors. The breadth of the business is often important to your cost advantage. The sources of cost advantages are varied and depend on the structure of the industrial sector. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials, and other factors.
Low-cost producer status involves more than lowering the learning curve. A low-cost producer must find and exploit all sources of cost advantage. Low-cost producers classically sell a standard, or unadorned product, and place considerable emphasis on the maturity scale or the absolute cost advantages of all sources.
If a company can achieve and sustain overall cost leadership, it will then be an above-average performer in its industry sector, as long as it can adjust its prices close to or in the industry sector average. At prices equal to or less than its rivals, a leader's low cost position translates into higher returns. However, a cost leader cannot ignore the bases of differentiation. If your product is not perceived as comparable or acceptable to buyers, a cost leader will be forced to discount prices far below their competitors to achieve sales.
A cost leader must achieve parity or proximity on the basis of differentiation relative to his competitors to be an above-average performer, even if he relies on cost leadership for his competitive advantage. Parity on the basis of differentiation allows a cost leader to translate her cost advantage directly into higher profits than her competitors. Proximity in differentiation means that the necessary price discount to achieve an acceptable market share does not outweigh the cost advantage of the cost leader and therefore the cost leader earns above-average returns.
The logical cost leadership strategy typically requires that one company be the cost leader, and not one of several companies fighting for this position. Many companies have made serious strategic mistakes in not recognizing this. When there is more than one aspiring cost leader, the rivalry between them is usually tough because every point of market share is considered crucial. Unless one company can gain cost leadership and "persuade" others to abandon their strategies, the consequences on profit (and long-term industrial structure) can be disastrous, as has been the case in several sectors. industrial petrochemicals. Thus, cost leadership is a strategy particularly dependent on previous acquisitions,Unless a major technological change allows a company to radically change its cost position.
Cost advantage
Cost advantage is one of the types of competitive advantage that a company can have. Cost is of enormous importance to differentiation strategies, because a differentiator must maintain a proximity in cost to that of its competitors. Unless the resulting premium price exceeds the cost of differentiation, a differentiator will not achieve superior performance. The behavior of the cost also exerts a strong influence on the general structure of the industrial sector.
The absence of a systematic framework for cost analysis in most companies underscores these problems. Most cost studies are narrow and take a short-term view. Popular tools like the experience curve can serve as a starting point, but it ignores many of the guides to cost behavior and obscures important relationships between them. Cost analyzes also tend to be overly reliant on existing accounting systems. Although accounting systems do not contain useful data for cost analysis, they often interfere with strategic cost analysis. Cost systems categorize costs on line items as direct labor, indirect labor, and cargo.that can obscure the fundamental activities that a company performs. This leads to the sum of the costs of activities with very different economies, and to the artificial separation of labor, material and general costs related to the same activity.
The value chain and cost analysis
The behavior of a company's costs and its relative cost position arises from the value activities that this company performs competing in an industry. A meaningful cost analysis examines the costs within these activities and not the costs of the business as a whole. Each value activity has its cost structure and its behavior can be affected by links and interrelationships with other activities both inside and outside the company.
Definition of the value chain for cost analysis
The starting point for cost analysis lies in defining a company's value chain and assigning operating and asset costs to value activities.
The inputs purchased are part of the cost of each value activity, and can contribute to both operating costs (purchased operating inputs) and assets (purchased assets).
For cost analysis purposes, disaggregation of the generic value chain into individual value activities should reflect three principles that are not mutually exclusive:
- The size and growth of the cost represented by the activity. The behavior of the cost of the activity. Competitor differences when carrying out the activity.
Activities should be separated for cost analysis if they represent a significant or rapidly increasing percentage of operating or asset costs of activities representing a small and static percentage of costs or assets. They should also be separate if they have different cost guides. Any activity that one business unit shares with another should be treated as a separate value activity, as conditions in the other units will affect its cost behavior. In practice, one does not always know the cost guidelines at the beginning of the analysis; therefore, the identification of value activities tends to require several iterations.
Differences between competitors increase the likelihood that an activity will be the source of relative cost advantage or disadvantage.
Allocation of costs and assets
After identifying the value chain, a company must assign operating costs and assets to value activities. Operating costs should be allocated to the activities in which they are incurred. Assets should be assigned to activities that employ, control, or influence their use to a greater degree. The allocation of operating costs is direct in principle, although it can be time consuming. Accounting records should be reviewed frequently to match costs with value activities rather than accounting classifications, particularly in general areas and purchased inputs.
Differentiation Strategy
Porter suggested differentiation as an alternative to cost leadership. With differentiation, the company cares less about costs and more about being perceived by the industry as unique in some way.
The objective of this strategy is to give the product distinctive qualities that are important to the buyer and that differentiate it from the competitors' offer. Thus, a correct difference allows to obtain superior benefits whenever the market is willing to pay a higher price. This strategy also involves significant investments in operational marketing with the aim of making the distinctive qualities of the product known to the market.
Unlike the cost leadership strategy, in which there can be a single cost-leading company in an industry, in the case of the differentiation strategy, in the same industry there can be many differentiating companies since each of them You can emphasize an attribute that differs from your rivals.
Differentiation requires certain exchanges with costs. Companies that opt for this strategy have to invest more in research than cost leaders. Your product designs must be better. To manufacture their products they have to use higher quality and generally more expensive raw materials. They have to invest more in customer service. They also have to be willing to give up a certain market share. Despite the fact that everyone recognizes the superiority of the product and the services, many customers are unable or unwilling to pay more for them.
However, differentiation does provide a viable strategy. Loyalty to a brand or company provides some defense against competitors. The unique nature of the differentiators is in a way a barrier to the entry of new companies. Their higher profit margins give them some protection against the providers because, due to their financial situation, they can afford to look for other options. The product offered by the differentiator has very few substitutes, and therefore customers have fewer options and less bargaining power.
From a negative point of view, differentiation, like cost leadership, carries certain risks. If the difference between the prices of the cost-leading competitors and the differentiators becomes too great, customers may abandon the latter and opt for the cost-leading competitor, the less differentiator. The buyer may decide to sacrifice some of the features, service, and uniqueness of the differentiator in order to save some. Second, what may one day make a company unique may have changed the next day. Buyers' preferences may also change. The unique feature offered by the differentiator can go out of style.
Ultimately, cost-leading competitors may be able to imitate the differentiator so well that they can win all their customers.
Concentration Strategy
With this strategy, the company focuses on the needs of a specific segment or group of buyers, without intending to target the total market.
The objective is to allocate a restricted market segment and meet the needs of this segment.
This strategy implies differentiation or leadership in costs but only with respect to the chosen market segment. It allows obtaining high market shares within the segment to which it is directed but which are weak with respect to the total market.
To conclude this presentation, it must be said that the choice of one or another strategy involves risks of a different nature and different forms of organization as well. Its implementation requires resources and the company-environment relationship is essential to achieve the expected results.
The treatment of the concept of value
It is impossible to deal with the concept of value without referring to the classics, specifically to Karl Marx. That is why it is necessary to start from the conceptualization that he made in his work Salary, Price and Profit as a report of one of the sessions of the General Council of the First International in June 1865. In it, the foundations are publicly exposed for the first time of his theory of surplus value.
In this document Marx states that «… a commodity has a value for being the crystallization of social work. The magnitude of its value or its relative value depend on the greater or lesser amount of social substance it contains; that is, of the relative amount of work necessary for its production. Therefore, the relative values of the merchandise are determined by the corresponding amounts or sums of work invested, carried out, reflected in them ». (one)
Taking into account other concepts and economic manifestations directly related to the concept of value, Marx conceptualizes that the values of commodities are in direct relation to the labor time invested in their production and in inverse ratio to the productive forces of the labor employed, considering the social substance common to all commodities: work.
From this thesis, price, as an economic category, will be inextricably linked to value, since in fact price is nothing more than the monetary expression of value. All goods are considered as values. Why then many times do the market prices exceed or remain below the value or the natural price?
In an earlier time Adam Smith explained this fact in the following way:
“The natural price is something like the central price, towards which the prices of all commodities constantly gravitate. Various accidental circumstances can make these prices sometimes exceed considerably of that one, and others descend a little below it. But, whatever are the obstacles that prevent them from stopping at this center of rest and stability, they continually tend towards it ». (two)
In disagreement with this, Marx states later in the same work that "… to explain the general character of profit you will have no choice but to start from the theorem that goods are sold, on average, for their true values and that the Profits are obtained by selling the goods for their value… If you cannot explain the profit on this basis, you will not be able to explain it in any way ». (3)
From these concepts it is then possible to speak of the value of merchandise or products from an perspective that allows profitability in the business management process and full satisfaction of clients or buyers, in full agreement with the approaches and reflections of Carlos Marx. about the topic.
According to Philip Kotter, author of recognized prestige, the value received by the client is the difference between the positive and negative values that a product provides, and to demonstrate this it does so based on those factors that determine the added value for the client.
Among the positive values are: the value provided by the product, the value of the services, the value of the personnel who have intervened in the production and performance of the services and the value of the image of the company or brand of the product.
Negative values are price, since any acquisition of a product or service represents the disbursement of a certain sum of money, the time spent, energy and the so-called "psychic costs".
Under this perspective, it is assumed that the client tends to choose the product whose sum of positive values is greater considering the total of negative values that he himself has.
This means that the strategy adopted must be aimed at offering the client a greater sum of positive values than negative values. To achieve this, it is necessary to know in depth the segment or segments on which the company operates and how customers define value. On this basis, the analysis of the company's value chain will allow more efficient management of those elements considered a source of competitive advantage and concentrate resources to eliminate the detected weaknesses. On the other hand, the analysis of the customer's value chain will allow the company's offer to be adapted to its needs and expectations, thus increasing the value of the product or service for the customer.
These approaches coincide with those of M. Porter, for whom, in competitive terms, value is the amount that buyers are willing to pay for a product or service. It must be a goal for companies to create value for buyers that exceeds the cost of their production and must be used in the analysis of competitive advantage, as well as cost, since companies often deliberately raise their cost to impose a higher price through differentiation, and this should not be the way.
For the Cuban business system, it is a necessity to adapt to the conditions of the current, turbulent and changing environment, which means that decision-making in this area requires a higher level of information and knowledge in order for market questions are increasingly better founded. The conception of marketing as a philosophy, extended in Cuba during the last decade of the last century, has become part of the organizational culture of many entities as a way to improve economic activity with a focus on efficiency and effectiveness.
In this sense, the identification of possible sources of competitive advantage is essential so that each company can design a successful offer for its target market or target audience. For this, the use of the Value Chain constitutes a valuable internal analysis and diagnosis instrument within the reach of managers, facilitating the design of the business strategy and at the different levels since it breaks down each of the activities into more discrete ones as well. to be able to assess how each one of them contributes or not to the creation of value for the client, and therefore, what strengths the organization has and can support and what weaknesses should be eliminated.
BIBLIOGRAPHIC QUOTES
(1) C. Marx. Salary, Price and Profit. Selected Works. Volume I. p. 205.
(2) A. Smith. Research about the nature and causes of the wealth of nations. p.93.
(3) C. Marx. Op, Cit. p. 210.
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