A couple of days ago I came across a post on direct plan portals going free on freefincal. The discussion that followed the article showed the way a consumer views a business. Since I have gone through a bit of competitive strategy by Michael Porter, it alters my view significantly. This article is to shed light on 2 views of a business, one from consumer POV and other from Businessman POV. The consumer view is called commoditized view and businessman view is called strategic view.
The Consumer’s views of a Business:
The consumer viewpoint as displayed in the article sees a business as a supplier of a commodity. One who sells a thing needed by him. This view is like a street dog view of a household. For it, all the houses are one and the same. Similarly to a consumer all the suppliers (direct plan portals) are one and the same. This is an idealistic view of perfect competition. For consumer its utopia, where he can do akkad bakkad bambe bo and choose one to do biz.
But this consumer’s view of perfect competition has a significant drawback. The major problem with a consumer is his short-term mindset. Essentially he wants his immediate needs to fulfilled and doesn’t think about the long-term implication of his action. Ex: He shifts to Amazon because his local shopkeeper has charged him more, for him both are one and the same. He may suddenly shift to Flipkart if Amazon fails him someway. In the case of direct plan portals, he may shift from kuvera to paytm to zerodha to invezta randomly. For a service provider, this will be a big headache as he will be having fixed costs to deal with. In dog analogy, the dog will shift its loyalty to whoever gives it food. This forced equalization of business by a consumer is what is called commoditization. This wanton change of business by a consumer is breeding ground of irrationality too.
If you confront a consumer and ask about his wanton change in service provider, you get a hopeful answer from him about someone always being there. This wanton change of provider also is a form of bias of seeing only 1 side of the picture. In the accounting sense, this is like a person focussing on the expense side and forgetting income side. This wanton change of service providers causes the creative destruction of an enterprise and the starting point of deflation. The deflation ensures innovation is curtailed as the businessman will not want to risk his capital on a solution which can be thrown out any moment by a consumer. This wanton change of service provider eventually leads shrinkage in the base of service providers, as existing ‘going to die’ provider will not be replaced by a new one always. It’s for this reason of irrational consumer the system favors the businesses.
The 3 tactics of business for standing out:
If you have read the competitive strategy by Michael Porter, you would get the 3 broad tactics used by a company to stand out in the marketplace.
- Low Cost
These 3 tactics are standard models of businesses. In the case of Low Cost, the producer tries to differentiate himself based on price by undercutting others in profitable operations. This kind of strategy is played by index fund producers or commodity producers. Since the product offering by these guys is same, the marketing will be on who is the cheapest. This low-cost leadership gives a company defensive position in the market, as this company will be last to bleed in price wars.
The differentiation strategy involves producer trying to stand-out from the competition. The attempt to differentiate will be in use of non-standard connections to the interfaces(like bose uses for speaker connections) or through some exclusive things for that platforms ( used by gaming platforms) etc… Even apple shows this differentiation strategy by having its own OS for its devices. This differentiation too gives a defensive position by creating awareness in consumer’s minds. Even differentiation can be done on quality parameters too. This standing out creates loyalty in consumers.
The focus strategy involves producer focussing his attention on 1 industry. This focus leads to specialization in that particular area of operation. This automatically differentiates the company in minds of the consumer as the specialist. Corning is an example of producer focussing on focus strategy, as they know everything about glasses. This specialization helps in them being low cost as well as differentiation as a specialist.
The Businessman’s views of a Business:
Unlike consumers who have a short-term focus, the businessman sees his business in long-term. So to differentiate himself from the competition he will use either of the strategies as explained before. The strategy will ensure his longevity in the business too. This focus on strategy flies in the face of commoditization. The decision to pursue one strategy over other depends on data a business has about its marketplace and data of its operations. Since every business doesn’t see itself as equal to other business, it tries to differentiate by having value-added services much to the chagrin of commoditizing consumers.
Sometimes the business may choose to give out the product for free and lock in consumers by using analytics to monetize. This strategy is an offshoot of the differentiation strategy. This is by far the common strategy used by direct plan portals. This differentiation also ensures the long-term survival of the portal as the consumer is supposed to make a binding choice and such a decision is not purely on a cost perspective. The long-term survival of a business is not based on the irrationality of the consumer, but on the success of its chosen strategy. But such a strategy have their chances of failure in an uncertain environment.
To sum it up.
- Consumers are irrational, hence they are bound by the system.
- Consumers love lower prices, and lowering of prices cause deflation and stifle innovation, hence systems are biased against the consumers.
- Consumers have a short-term mindset, focussing only on the immediate and near-term gratification.
- Businesses have fixed costs always, hence they hate irrationality.
- No businesses like to see them as equal to other, hence it always tries to stand out.
- The businesses have 3 general strategies of Low-Cost Production, DIfferentiation, and Focus.
- Businesses always have a long-term focus, as they get returns only in long-term.