to business. Products with high degrees of utility are not price sensitive whilst those with little utility are. This the economist calls the Elasticity of Demand. The strictly growth business must understand the relationship between demand and investment. This requires understanding the elasticity of demand for the business’s products, whether they are or are like to become commodities or survive as differentiated products throughout their product life. The Elasticity of Demand for a commodity product will generate large volume increases with small price changes whereas the volumes demanded of highly differentiated products are hardly affected by price changes.
The graphs shown above demonstrate this. A small price reduction from p1 to p2 results in a large increase in volume for the commodity product, q3 to q4, but a small price increase for the differentiated product only generates a small volume increase from q1 to q2.
Profitable businesses can be built upon either circumstance for so long as the business understands the type and extent of investment that will be required.
Strong investment in low cost manufacturing will be essential to generate worthwhile volume and profits from a commodity product. Investment in a highly differentiated product will more likely be related to strong research and development and marketing.
The Utility of the product is partly a generic issue relating to the entire market and partly a particular issue relating to the design of the individual business’s product. It is important to understand the actual and potential Utility of the generic market product as well as the individual products offered by each competitor. The Utility of the generic industry product is a function of the market environment. Technologies as well as customer needs and fashions change and all products compete one with another for their share of the consumer’s disposable income. The business needs to be sure that the generic product market it is choosing to exploit has a long term future providing utility to the customer base. Commodity products tend to have very long term utility whereas highly differentiated products may be more sensitive to fashion and be relatively short lived. The long term future of the product market is central to the establishment of the business mission.
The Utility of an individual firm’s product in the market will relate to its competitive position. The more utility consumers see in a product the more competitive and less price sensitive it will be.
New products will initially behave as monopolistic products but could become competitive products very quickly. Patents and speedy product development will tend to extend this monopolistic nature.
Established products require differentiating if they are to be less price sensitive. Utility can be improved by product quality, added value, customer service, brand strength and promotion.
Obviously the strictly growth business would like it’s products to have as much utility as possible, remain monopolistic as long as possible and thereby command both a higher price and a more competitive position.
SKILLS AND CASH
The strictly growth business business must satisfy itself that it has the knowledge base, human resource skills and cash for it to be able to excel. This core competence can be either in marketing or technology.
The business with marketing core competence will seek to supply a range of products designed for a specific customer base. It may well manufacture these products, but marketing driven businesses can also be either designers or distributors only, factoring a range of products from specialist manufacturers.
The technology driven business will use its unique competence to design and manufacturer a range of products based on its technological skills. It might choose to sell these products direct or via distributors.
Each product market requires different levels of functional support. Some markets e.g Pharmaceuticals, demand exceptionally large research and development resources. Other markets e.g. consumer goods, require high levels of advertising and promotion.
The real cost of operating in a given market is the mix of functional support required to maintain it in the long term.
The strictly growth business needs to know whether it can source, attract and finance the resources required by the product market. Every business has its own core competence where it has both the knowledge base, the human resources and unique competitive strengths. The business should build on these rather than seek to add new competence. Adding competence is not only difficult but also highly risky. However successful a business may be it will be known in the market for its own particular skills and expertise, and it will always find it difficult to attract the best human resources in new areas of competence.
Growth for any product line must always be financed from cash flow, or the very strong certainty of immediate future cash flow. Absolute certainty in the future is impossible of course and financing growth from projected future cash flows is one of the most risky ventures. The strictly growth business will have a number of products in the portfolio to support and each should ideally rely on its own performance.
COMPETITIVE FORCES
Successful business is a war without end. No sooner has one competitor been vanquished than another moves in to attack. The vanquished competitor suddenly reappears with a far better weapon and renews the battle.
Every competitor is there to win and to prevail. The battle is fought over consumer preference and success is measured in terms of market share, cash generation and return on investment. The central marketing issue is product design. The central financial issue is the investment. The winners stay in business and enjoy excellent financial benefit. The losers at best make do with poor financial benefit, and at worst lose everything. Forcing the competition out of business is the ultimate goal. Closure is invariably caused by inadequate funds from poor volumes. Monopolies are simply not legally possible in the modern political environment and there will always be a number of competitors at work in any market. The winners command the largest share and, usually, the largest cash flow and best return on investment.
Choosing the war to fight is the single most important decision the strictly growth business ever has to face. Making this decision requires an understanding of commercial and political competitive strength.
The strength of competitive forces influences the market entry and positioning decisions. Every market will either have powerful competitive businesses already present or highly likely to be present over time. The business needs to satisfy itself that it has the skills, technology, willpower and financial muscle to survive the competitive challenge. Every market is made up of sectors and the competitive situation will vary within each. It is never easy to establish new skills and technology and businesses can quickly become at risk of playing catch-up. It is not enough for a business to have the financial capability to match competitors but also, and far more importantly, it has to have the willpower to stay the course. The decision to enter, or to continue operating in, one particular market will be affected by the opportunities available in other markets. The business has to believe it does have the competitive strength and willpower, and others do not, to decide to take on the battle.
Political considerations are also a central part of determining strategy. Some countries have very controlling governments and will support indigenous businesses at all costs. When key clients or competitors lie within these countries the ability to compete effectively can be drastically diminished. The developed western markets are generally free and open to fair competition but local businesses, whether independent or corporate,
