Saturday, July 19, 2008

Brands Demystified

Often people misconstrue brands as a form of competitive advantage.Firstly,What is competitive advantage? it means that it allows an incumbent firm to do what its competitors are not able to do or it deters them from emulating the incumbent firms is an effective barrier to entry.So, basically barriers to entry and competitive advantage are the same thing. Only incumbent competitive advantage has value and not entrant competitive advantage bcoz entrant competitive advantage implies absence of barriers to entry for the incumbent firm. By definition, a successful entrant becomes an incumbent and then is vulnerable to the next entrant and the process continues with the every new entrant replacing the previous incumbent and this implies that are no competitive advantages neither for the incumbent nor for the entrants.
Now lets consider brands which are often mistaken to be a source of competitive advantage. Branding is like any other asset of a company which requires investment in form of marketing and advertising. By branding a firm can only make its presence felt in the market. It is an important asset of the company and cant be taken in a a loose manner but at the same time it doesnt deserve so much hype it gets compared to other assets. Its just an important asset of the company and by itself it will not drive excellent returns for the business. It wouldnt protect a lousy business. A competitive advantage is something which enables a business to earn high return on invested capital and keeps the rival at bay. It enables it to take away a disproportionate share of the market. A high return on invested capital and a disproportionate share of the market is a tell-tale sign of presence of competitive advantages or barriers to entry. Not many branded products show high returns and dominate their markets. they might show high returns in the short-run but not in the lon-run
It is not branding per se which drives the returns of the business but economies of scale with high customer captivity. Most of the branded products are in a market called monopolistic competitive market where in the long-run they dont tend to be highly profitable because there arent any effective barriers to entry. A monopolistic competitive market is defined as the one where there are large no of firms selling similar but differentiate products which means that the products sold by different firms are close but not perfect substitutes of each other
For example : soft-drink market,apparel market and various other brand oriented markets. Theoretically, in the long run in a monopolistic competitive market firms are not highly profitable and their profitablity tend towards zero.
For instance, consider the soft-drink market where there are a number of brands which differ slightly from each other in terms of taste and to some extent in color. In a study of demand for colas which used a simulated shopping experiment to determine how the market share of a Royal crown and Coca-cola changes in response to its price. In other words how elastic is the demand for a brand.

It was found that Royal crown is much less price elastic than coke i.e its demand is not much reponsive to price increases. The study seems to suggest that consumers are more loyal to royal crown and it has more brand loyaly than coke. But even because of higher brand loyalty it is not more profitable than coke. Profits depend on fixed costs and volume, as well as price. Coke will generate more profit beacause it has a much larger of market. Its the economies of scale which enables coke to spend heavily on advertising,marketing and distribution and this practice over a long period of brand reinforces the brand and keeps new brands at bay. Competitive advantages are supposed to protect profits and brand loyalty doesnt pass on that terms. Its the inherent characteristic or nature of the product which makes the customer more loyal to it than brands. people in america are habituated to coke and that is because of the first-mover advantage for the coke and the scale which enables it to sells at such a low price- the price difference between coke and any other brand is few cents and that prevents its consumer from switching to alternate brands just for price difference of a few cents.
Being a first mover in the market is more important thand brands.
At the end of the day brands are just necessary cost of doing business and making a presence in the market , nothing more and nothing less.

Thursday, July 17, 2008

Innovation doesnt seem that Innovative

Professor William Duggan teaches strategy course at Columbia wherein he attempts to explain the strategic success in the realm of all human endeavors right from business to politics to war. He set out to discover why the word strategy was not used until 1810, a time when napoleon was at the zenith of his power. At the same time a German military analyst began his treatise called On war in which he endeavors to explain the key elements of napoleon’s success. He attributes napoleons success largely to what he calls coup d’oeil, which in French means “glance”. According to Clausewitz napoleon had an encyclopedic knowledge of military history which enabled him to apply successful tactics of past generals to new situations. He didn’t pursue territorial objectives but sought opportunities where he could replicate successful tactics of past battles. It was just a new way of combining past ideas and adjusting it to new situations. It was as if he was looking for some recognizable pattern wherein he could apply the same old successful ideas instead of any novel ones.
Research on expert intuition suggests that in urgent situations people make decisions by combining analysis of past experiences with a flash of insight. In the 1990s psychologist gary klein studied the decision making processes of people which were usually involved in some emergency situation or the other like nurses, firemen and soldiers in battles. Initially they attributed their decision making to insight however further probing revealed that they actually combined past experiences from their memories to the situation at hand. Our brain tends to take whatever it can and then it compares it with the things already present and when it finds a combination we get an insight. This process is opposite to innovation but this is the way innovation actually happens.
One can actually have a strategic framework wherein one first needs to stock his memory shelves with as much examples as one can pertaining to that field and then to open the mind to coup d’oeil one requires presence of mind which is to expect the unexpected and avoid forming any preconceived notions about the solution. This implies refraining from creating any plan prior to deciding a goal. But instead one must keep searching for opportunities and include an element of flexibility i.e willingness to move forward without detailed plan and also to change direction if better opportunity presents itself. Instead of starting with the question, What’s the goal? One must start with, What’s a good goal? And a good goal is the one to which one can see some way of reaching. One must not decide a goal on the basis of appeal but on the basis of some way to achieve it. The idea of having multiple possible directions is much more realistic in life and gives many more options. Just remember that some opportunity may arise that will take you somewhere better.

For Further Reading
Napoleons Glance by William Duggan