Relative Price And Performance Relationship

Relative Price And Performance Relationship 2.1 INTRODUCTION In essence, the job of a strategist is to understand and cope with competition. Often, managers define competition too narrowly, as if it occurred only among todays direct competitors. Lall, (2001, p. 6) stated that competitiveness in industrial activities means developing relative efficiency along with sustainable growth Moreover, agribusiness competitiveness has been defined as The sustained ability to profitably gain and maintain market share(Martin, Westgren, van Duren, 1991, p. 1456) or, in a more consumer-oriented way, as the ability of a firm or industry segment to offer products and services that meet or exceed the customer value currently or potentially offered by the products and services of rivals, substitutes, and possible market entrants (Kennedy, Harrison, Kalaitzandonakes, Peterson, Rindfuss, 1997). Yet, according to Michael E. Porter, the Harvard Business School professor, competition for profit goes beyond established industry rivals to include four other competitive forces as well as customers, suppliers, potential entrants and substitute products. Furthermore, the model of Five Competitive Forces was developed by Michael E. Porter in his book Competitive Strategy: Techniques for Analysing Industries and Competitors in 1980. It draws upon Industrial Organisation (IO) to develop five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in the context of business environment refers to the overall industry profitability. An unattractive industry is one in which the combination of these five forces acts to drive down the overall profitability. A very unattractive industry would be one approaching pure competition, in which available profits for all firms are driven down to zero. The character, mix, and subtleties of competitive forces are never the same from one industry to another. A powerful and widely used tool for systematically diagnosing the principal competitive pressures in the hydroponics market and assessing the strength and importance of each is the five-forces model of competition.(see figure) Moreover, three of Porters five forces refer to competition from external sources. The remainders are internal threats. Therefore, it is important to use Porters five forces in conjunction with SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) and PEST Analysis (Political, Economical, Social and Technological). Porters Five Forces 2.2.1 Threat of new entrants One of the defining characteristics of competitive advantage is the industrys barrier to entry. It is very expensive for new firms to enter an industry where there is high barrier of entry. Furthermore, profitable markets that yield high returns will attract new firms. In this situation, these new entrants could change major determinants to the market environment (e.g. market shares, prices, customer loyalty) at any time. In the 1993 reprint of the first edition of Bain (1956, pp. 53-166), three main factors are considered as entry barriers: economies of scale, product differentiation advantages, and absolute cost advantages. Moreover, as more firms enter the market, you will see rivalry increase and profitability will fall to the point where there is no incentive for firms to enter the industry. Likewise, the threat of the new entrants will depend on the extent to which there are barriers to entry. These are typically: Economies of scale According to Kislev et al, it is generally accepted that agricultural production is characterized by increasing returns to scale. If economies of scale exist, it represents a high barrier of entry. Firms within the industry will have achieved these economies and if we enter this industry we will have to match their scale size of production in order to compete with them. Thus according to Michael Porter, since EOS does not exist in a tangible way, we need to prove their existence first before trying to compete with the existing firms. Capital requirements This refers to how much money should the firms have to tie up to keep the doors open. This is also a barrier to entry as if firms have to tie up large amounts of capital for daily operations; this will deter smaller firms from entering. Dr. Pieter A.Schippers said that hydroponics requires high-cost installations marketing gourmet vegetables at ritzy prices. According to AREU, the capital investment for hydroponics in Mauritius is up to three million rupees. Brand identity According to Erin Ferree ,Brand identity is the combination of consistent visual elements that are used in your marketing materials. A basic brand identity kit consists of a logo, business card, letterhead, and envelope. It can be extended to include a Web site Where there is brand identity there is high barrier to entry and regarding the hydroponics market in Mauritius, there are no such barriers in the field of hydroponics as it is a newly grown market. Access to Distribution The new entrant must, of course, secure distribution of its product or service. A new food item, for example, must displace others from the supermarket shelf via price breaks, promotions, intense selling efforts, or some other means. The more limited the wholesale or retail channels are and the more that existing competitors have tied them up, the tougher entry into an industry will be. Sometimes access to distribution is so high a barrier that new entrants must bypass distribution channels altogether or create their own. Switching cost Switching costs are fixed costs that buyers face when they change suppliers. Such costs may arise because a buyer who switches vendors must, for example, alter product specifications, retrain employees to use a new product, or modify processes or information systems. The larger the switching costs, the harder it will be for an entrant to gain customers. Enterprise resource planning (ERP) software is an example of a product with very high switching costs. Once a company has installed SAPs ERP system, for example, the costs of moving to a new vendor are astronomical because of embedded data, the fact that internal processes have been adapted to SAP, major retraining needs, and the mission-critical nature of the application. 2.2.2 Bargaining Power of suppliers The term suppliers comprises all sources for inputs that are needed in order to provide goods or services and bargaining power is the ability to influence the setting of prices. Therefore, bargaining power of suppliers will identify the extent to which your suppliers can choose to raise prices, reduce quality or reduce service without consequence. The more concentrated and controlled the supply, the more power it wields against the market. Monopolistic or quasi-monopolistic suppliers will use their power to extract better terms (higher profit margins or) at the expense of the market. Moreover, in a competitive market, no one supplier can set the prices. Likewise, suppliers can group to wield more bargaining power. The conditions making suppliers, as a group, powerful tend to mirror those making the buyers powerful are as follows: Differentiation of inputs A primary goal of the theory of product differentiation is the determination of market structure and conduct of firms that can choose the specifications of their products besides choosing output and price. Traditional models of product differentiation and marketing have focused on products that are defined by one characteristic only. ( See Hotelling (1929), Vickrey (1964), DAspremont, Gabszewicz and Thisse (1979), Salop (1979), Economides (1984), Anderson, de Palma, and Thisse (1992), among others in economics and Hauser and Shugan (1983), Moorthy (1988) and Kumar and Sudarshan (1988) in marketing.) Threat of forward integration The traditional market foreclosure theory, which was accepted in leading court cases in 1950s-70s, viewed vertical merger as harming competition by denying competitors access to either a supplier or a buyer. (Arrow, K., Vertical Integration and Communication, Bell Journal of Economics, 1975, 6, 173-183.) The critics argue that the theory is logically flawed, and a vertically integrated firm cannot benefit from excluding its rivals (e.g., Bork, 1978; and Posner, 1976). The paper by Salop and Sche ¤man (1987) forms the basis for this argument, and Ordover, Saloner, and Salop (1990, hereinafter OSS) is perhaps the best-known paper that pioneered the equilibrium approach to the analysis of vertical mergers. In this paper, I shall argue that the new theories on vertical mergers have ignored an important point, namely that vertical integration not only changes the integrated firms incentive to supply inputs to its downstream rivals, but it may also change the rivals incentives to purchase inputs from alternative suppliers. Once this is realized,an equilibrium theory of vertical mergers can be developed without some of the controversial assumptions made in the literature, and this theory can provide a framework in which the competitive effects of vertical mergers are measured and compared. The basic insight of my analysis is that vertical integration creates multimarket interaction between the integrated firm and its downstream rivals. A rival may recognize that if it purchases inputs from the integrated firm, the integrated firm may have less incentive to cut prices in the downstream market, which will benefit the rival. Therefore, vertical integration can change the incentive of a downst ream rival in selecting its input supplier, making it a strategic instead of a passive buyer in the input market. Supplier concentration relative to industry concentration Trade theory predicts that if trade costs go down or if productivity rises exogenously in a pool of potential suppliers with heterogeneous productivity levels, the number of suppliers will enlarge (Helpman, Melitz and Rubinstein 2008).An exogenous taste for variety, or a desire to limit monopoly positions, would also lead to a larger number of suppliers, although these forces are static. In the presence of heterogenous quality, however, the dynamics of diversification/concentration can be different. Access of labour According to Bertram,G. (1986), he assumes that output is governed by a well-behaved, continuous, constant returns to scale, aggregate production function involving two factor inputs, capital and labour.( Bertram, G. (1986), Sustainable development in Pacific micro-economies, World Development, Vol. 14 No. 7, pp. 809-22.) Importance of volume of supplier According to Hahn et al., 1990; Humphreys et al., 2004; Krause, 1997; Krause et al., 1998; Li et al., 2007; Watts and Hahn, 1993, buyer-supplier relationships are becoming increasingly important as buyers realize that their success is often tied to the capabilities and performance of suppliers. Many organizations engage in supplier development to assist suppliers in improving supply chain performance and capabilities. Bargaining power of buyer According to Inderst (2007), buyer power is the ability of buyers to obtain advantageous terms of trade from their suppliers. Monopsonistic or quasi- monopsonistic buyers will use their power to extract better terms at the expense of the market. In a truly competitive market, no one buyer can set the prices. Instead they are set by supply and demand. Prices are set by supply and demand and the market reaches the Pareto-optimal point where the highest possible number of buyers are satisfied at a price that still allow for the supplier to be profitable. Porter states that a buyer group is powerful if it: purchases large volumes relative to seller sales; learns low profits; the products it purchases from the industry represent a significant fraction of the buyers costs or purchases; the products are standard or undifferentiated and face few switching costs; the industrys product is unimportant to the quality of the buyers products or services; buyers pose a credible threat of backward integration; The buyer has full information. Additionally, with the bargaining power, buyers can impose on suppliers and thus can choose their suppliers. According to Ghodsypour and OBrien, (1998); Weber et al., (2000) and Dahel, (2003), this can be done by using the linear programming models. Moreover, the multi-objective programming model developed by Weber and Ellram (1993) can helps buyer to select a pool of suppliers and determine the purchasing units to be allocated among the suppliers. Buyer switching cost Buyer-supplier relationships play a key role in the success of a supply chain (Chen and Paulraj, 2004; Lin et al., 2001; Storey and Emberson, 2006); however, organizations often face the problem of choosing appropriate suppliers (Pagell and Sheu, 2001; Chen and Paulraj, 2004; Wadhwa et al., 2006; Phusavat et al., 2007). The problem of choosing suppliers so that profits can be maximized has become increasingly vital to an enterprises survival due to keen competition in the micro-profit era (Giunipero et al., 2006). Numerous studies have addressed the issue of the buyer-supplier relationship in supply chain management. One stream of research examines related variables, such as cooperation, satisfaction, trust, and commitment, which make the supply chain relationship successful (Byrd and Davidson, 2003; Fynes et al., 2005; Malhotra et al., 2005). Another stream focuses on the criteria for choosing suppliers, such as quality, on-time delivery, and costs (Chen and Paulraj, 2004; Blackhurs t et al., 2005; Gunasekaran and Kobu, 2006; Phusavat and Kanchana, 2008). Among these criteria, costs have received the most attention because they are considered the key factor in choosing suppliers (Noordewier et al., 1990; Kalwani and Narayandas, 1995; Dahlstrom and Nygaard, 1999; Zhao and Yang, 2007). Buyer information Another reason why buyers were in such a strong bargaining position was because they had full information about demand, actual market prices, and even manufacturer costs. The buyers comparative information was often better than what was available to manufacturers, and thus with such full information, retailers were able to ensure that they received the most favourable prices offered to others, and were able to oppose suppliers claims that their viability would be threatened if prices were reduced. Owing to all of the above reasons, one can see that the bargaining power of the Australian food retailers was so great in the early 1980s that they were perhaps in a unique position of strength even in a global sense. The current barriers for purchasing organic products mainly relates to price, availability, and consumer awareness. Moreover, offering customers and obtaining greater value added by creating, developing, and maintaining lasting customer-supplier relationships (Rexha,2000; Van der Haar et al., 2001), such that both parties benefit (Gro ¨nroos, 2000; Kothandaraman and Wilson, 2001; Sharma et al., 2001; Walter et al., 2001; Leek et al., 2003), is considered fundamental for guaranteeing the success and survival of companies in the market. Suppliers adapt to the customers needs in order to satisfy them. This adaptation can encourage the customer to behave opportunistically (Brown et al., 2000; Wathne and Heide, 2000). But if the supplier is able to adapt, and satisfy customer needs better than its competitors, enduring relationships can develop between both agents. Brand identity of buyer According to Aaker, (1991, 1996), brand identity is a message about a brand that a firm seeks to communicate with. This communication is undertaken via the product, the brand name, symbols and logos, historical roots, the brands creator, and advertising (Kapferer, 1998 Some organisations base their competitive advantage on physical assets such as a manufacturing facility, some on their employees, and some on their distribution networks (Kotler, 2000). Many others, however, seek to attain a competitive advantage from intangible assets such as their reputation or the brands that they own (Beverland, 2005; Keller, 1993; Low and Blois, 2002). Yet, research to date on branding in business and industrial marketing has been limited (Beverland et al., 2006; Low and Blois, 2002; Mudambi et al., 1997; Nilson, 1998). Price sensitivity Porter (1985) has defined two primary types of competitive strategy that can provide a source of competitive advantage: differentiation and low cost strategy. The low cost strategy, which may enable a price leader position, can lead to price wars and is therefore risky for all digital products and services, including retail banking. Ultimately only one company can be the price leader, thus all other companies should contemplate alternative strategies. Likewise, marketers and researchers are familiar with the concept of price elasticity, which describes changes in the quantity of demand for a product associated with changes in price of the product. If demand is elastic, changes in price level have a proportionally greater impact on demand. Inelastic demand describes the case where changes in price have little effect on demand. The concept of price elasticity describes the aggregate response of a market segment to price levels. Price sensitivity is an individual difference variable describing how individual consumers react to price levels and changes in price levels. A consumer high in price sensitivity will manifest much less demand as price goes up (or higher demand as price goes down), and consumers low in price sensitivity will not react as strongly to a price change. Standardize products A large majority of respondents believed that many retailers considered most food products to be fairly standard, and thus, as they could most often find alternative suppliers, they played one manufacturing company against another. It was the respondents view that such tactics also extended towards substituting house brands and generics for brand names, and these aspects will be considered later. Thus, unless a manufacturer had very strong end-user demand for its brand (e.g. Vegemite, Milo, Pal), it found that its product was capable of being substituted unless it succumbed to retailer pressure. Threat of substitute products All firms in an industry are competing, in a broad sense, with industries producing substitute products. The impact of substitutes affected certain segments of the food industry more than others, the obvious examples being the yellow fats segment (butter versus margarine), the sweeteners segment (sugar versus sugar substitutes) and the pet foods segment (canned versus dry). The food industry as a whole is, in fact, competing with other substitute expense categories such as entertainment and personal items. While expenditure on food will never fall below an essential base level. Research done by Ogilvy and Mather (1983) seems to suggest that more people cut back on food during the early 1980s, in order to cope with inflation, than on other expense categories. The following factors are being considered when analyzing the threat of substitute products: Buyer propensity to substitute For sellers, it is crucial to win a buyers trust, then nurture it over the course of a relationship. Trust enables the buyer to economize cognitive and emotional energy and rely on a seller before extensive information can be gathered (Luhmann, 1979; Jones and George, 1998; Yamagishi, 2002; Mayer et al., 1995). As trust matures, the buyer identifies with (Lewicki and Bunker, 1995) and feels affection and devotion for the seller (McAllister, 1995). Trust is therefore strongly linked to buyer commitment (Moorman et al., 1992) and loyalty (Morgan and Hunt, 1994). A sellers violation of trust occurs when the buyer perceives evidence that the seller failed to meet the buyers confident expectations (Tomlinson et al., 2004). Relative price/performance relationship of substitutes Shapiro (1992) argues that institutional investors, who normally trade in large quantities, are concerned with the opportunity costs involved in undertaking these large trades. Many suppliers, in turn, face a growing trend towards commoditization of products (Rangan and Bowman, 1992) and search for new ways of differentiating themselves through improved customer interactions (Vandenbosch and Dawar, 2002). From an academic perspective, there is a rich and growing body of research focusing on buyer-supplier relationships in business markets (Ulaga, 2001). More broadly, researchers have coined the term relationship quality which is typically assessed through some combination of commitment, satisfaction and trust (Crosby et al., 1990; Dorsch et al., 1998; Hewett et al., 2002). According to Wilson (1995, p. 337) trust is a fundamental relationship model building block and as such is included in most relationship models. In addition to trust, Morgan and Hunt (1994) identified commitment as another key-mediating variable of relationship marketing. Furthermore in their commitment-trust theory of relationship marketing, Morgan and Hunt (1994) establish trust as a key-mediating variable that is central to relational exchanges. Moreover, customer satisfaction is widely accepted among researchers as a strong predictor for behavioural variables such as repurchase intentions, word-of-mouth, or loyalty (Ravald and Gro ¨nroos, 1996; Liljander and Strandvik, 1995). Satisfaction research is mainly influenced by the disconfirmation paradigm (Parasuraman et al., 1988). Competitive Rivalry The rivalry amongst existing firms analysis will help you to understand the risk that your competitors may compete for market position and if their competitive tactics are likely to be effective. Furthermore, you will find that your competitors may compete for market position using tactics such as pricing competition, advertising as well as increasing customer service. To analyze industry rivalry in your industry, you will need to consider the following factors: Diversity among competitors The first point of departure is found in Miles et al.(1993)and Miles and Snow (1986) proposition that strategy in diversity and structure is normal in any industry, that it is good for and industry and furthermore that various configurations of strategy and structure may be equally effective in producing high performance. Industry growth rate When hydroponics industry is in a growth phase there will be room for the industry to grow, as a result there will be a low risk of competitor rivalry. Thompson et al., (2008) stated that rivalry becomes stronger if demand growth is slow. Exit barriers Powell (1995) incorporated entry barriers and industry rivalry in his research and found a significant correlation of firm performance with entry barriers (r  ¼ 0:29; p , 0:05) and industry rivalry (r  ¼ 20:32; p , 0:05). These results indicate the higher the entry barriers, the lower the threat of new entrants and the better the opportunities for improved performance; and similarly, the higher the industry rivalry, the tougher the industry competition which would mean the lower the firm performance. A critique of Porters model There are, however, several limitations to Porters framework, such as: It tends to over-stress macro analysis, i.e. at the industry level, as opposed to the analysis of more specific product-market segments at a micro level. It oversimplifies industry value chains: for example, invariably buyers may need to be both segmented and also differentiated between channels, intermediate buyers and end consumers. It fails to link directly to possible management action: for example, where companies have apparently low influence over any of the five forces, how can they set about dealing with them? It tends to encourage the mind-set of an industry as a specific entity with ongoing boundaries. This is perhaps less appropriate now where industry boundaries appear to be far more fluid. It appears to be self-contained, thus not being specifically related, for example, to PEST factors, or the dynamics of growth in a particular market. It is couched in economic terminology, which may be perceived to be too much jargon from a practising managers perspective and indeed, it could be argued that it is over-branded. SWOT Analysis SWOT analysis, which is originally introduced in 1969 by Harvard researchers (e.g. Learned et al., 1991), calls for an external assessment of the opportunities and threats that exist in a firms environment and an internal assessment of the strengths and weaknesses of the organisation. The SWOT framework became popular during the 1970s because of its inherent assumption that managers can plan the alignment of a firms resources with its environment. Subsequently, during the decade of the 1980s, Porters (1980) introduction of the industrial organization paradigm with his five forces models gave primacy to a firms external environment, overshadowing the popularity of SWOT. More recently, at the start of the twenty-first century, SWOT is alive and well as the recommended framework for case analysis in many of the leading strategic management and marketing texts (Hitt et al., 2000; Anderson and Vince, 2002). However, despite its wide and enduring popularity, SWOT has remained an theoretica l framework, of limited prescriptive power for practice and minor significance for research (Dess, 1999). Generally, firms are asked to develop strategies to guide the organisation to ward opportunities that may be exploited using strengths of the organisation, push the organisation away from threats in the environment, maintain existing strengths and improve organisational weaknesses. Recently, Duncan, Ginter and Swayne (1998) suggested a four step model for assessing internal strengths and weaknesses. Their four steps include surveying, categorising, investigation, and evaluating. The tables below show the Strength, weaknesses, opportunities and threats of hydroponics in Mauritius. STENGTHS WEAKNESSES Growing demand for vegetables, both consumer and business markets. Environment-friendly practices favoured. Provide employment. Flexible in production. Poorly structured distribution channels. Finance: such project requires huge investments. Insufficient use of technology: growers in Mauritius cannot afford to adopt latest technology such as those used in Australia and USA due to high costs. Equipment and other materials have to be imported. Lack of trained trainers. OPPORTUNITIES THREATS Favoured business environment- laws and legislations have been modified so as to propel small business. Examples are the introduction of the Municipal Fee, replacing the Trade Licence, Special Tax Holiday Scheme, cancellation of customs duty on several products and Empowerment Programme. Incentives offered to registered enterprises by SEHDA, National Computer Board and so on. Examples are awards to the best business plans, business counselling and facilitation. Increasing cost of doing business. High inflation rate causing depreciation of the Mauritian Rupees. Favourable prices of the substitutes. PEST Analysis PEST (or political, economic, social and technological factors) is the most commonly used tool for environmental analysis (Beamish, 1996) and is possibly the second most widely known strategy technique after SWOT analysis. Political/ Legal Environment: in most countries, the government provides much needed support to those who want to invest in hydroponics technology. Examples are tax relieves on equipment, free counselling, training, incentives to set up small businesses, loan facilities and so on. Regarding the Economic Environment, these issues should be considered: Income is a major influencer of consumer purchasing power. For instance, a fall in income caused by an increase in the rate of inflation may result in a fall in purchasing power. Consumers may buy more of the organic vegetables, which are cheaper than the hydroponics vegetables. The reverse is also true. Changing consumer spending patterns influence the demand for hydroponics produce. It has been noted that there is an increasing tendency for consumers to spend more and more on leisure activities, transportation, medical-care and education rather than food. But with the new budget made by the finance minister, we can expect that the spending on education will decrease and ultimately result to and increase in food or other activities also. Social/ cultural Environment: a study by the NZ Vegetable Growers Federation (www.vegetables.co.nz) , found that nearly 40% of people who purchase organic food do so because they believe it is pesticide-free. Technological Environment: growers of hydroponics produce who do not adopt the best practice technology will be disadvantaged and gradually lose access to all but low margin residual markets. However, there is a profound gap between PEST and SWOT analysis, and this is only partly met by Porters five forces. A linking technique is that of Grundys growth drivers (Grundy, 2004). See the diagram below. Grundy gives an example of growth driver analysis, helping us to represent the forces that, directly or indirectly, cause or inhibit market growth over a particular time period. However, an important feature to note here is that it is part of a system. The system captures, in an onion model format, the key domains that need to be thought through, within the overall competitive climate, beginning with: _ PEST factors _ growth drivers _ Porters five competitive forces _ competitive position. These layers of the onion are highly interdependent, which might be a very useful phenomenon for managers to learn about and to apply. For example, where the PEST factors are generally hospitable, growth is encouraged and the full impact of the five competitive forces may not be felt and may thus be latent. However, where the PEST factors become inhospitable, this will clearly dampen the growth drivers, and if the growth drivers within a particular market are themselves tightening, for example due to life-cycle effects, then this will put a disproportionate and adverse pressure on Porters five forces, particularly in the bargaining power of buyers, and also upon rivalry. Furthermore, a high growth environment may encourage entrants and a low one will discourage these. The result can lead to a collapse in confidence and in prices unless there are lots of exits.