Independent University, Bangladesh (IUB)

SCHOOL OF BUSINESS

Make a comparison between suppliers and buyers bargaining powers while evaluating an
external environment.
The bargaining power of the suppliers and buyers depends on several factors which influences
whether the bargaining power is strong or weak of the buyers and suppliers. The factors which
influence the bargaining power of the suppliers are:
 The demand and availability of the suppliers product - when the demand for the suppliers
product is very high and supply is low in this given scenario the bargaining power is high
and for vice versa situation the bargaining power is low for the suppliers.
 Switching costs of the buyers to other suppliers - when the buyers can easily shift from
one supplier to another without worrying about costs or the cost is very low the
bargaining power of the supplier is weak and when switching cost is high suppliers
bargaining power is high.
 The size and the number of suppliers in relation to the buyers -when there are less
suppliers in the industry and the industry is determined by few major companies, the
bargaining power of the suppliers is strong and when many suppliers exists in the
industry, suppliers are weak.
 Whether the suppliers provide differentiated products which enhance the industry's
product - when the suppliers provide standardized product the bargaining power is less
but for differentiated product it is more.
 The ability of the buyers to go into backward integration - when a buyer can easily enter
into the suppliers business through backward integration the bargaining power of the
suppliers is less they will not be able to charge high.
 Availability of substitutes for the supplier's product - when the buyers can easily shift to
other substitutes, and when the suppliers increases price the bargaining power of the
suppliers will eventually go down but when there are no substitutes available power of
the suppliers will go up.
 Fraction of the cost of the suppliers product in relation to the total industry's product cost
- when the suppliers input is low percentage of the total cost of the production process the
bargaining power of the suppliers is but when the input has a higher fraction of cost the
power of asking high price by the supplier goes down.
 Majority of the customers are from the industry members - when majority of the
customers are from the industry members, the bargaining power goes down for the
supplier since they don't have much customer outside the industry and thus they cannot
charge high price to their buyers.
 The factors influencing the bargaining power of the buyers are:
 Strength of demand and availability of product - when the demand for the suppliers
product is low and supply is high the bargaining power of the buyer becomes high and
they can ask for lower price from suppliers
 Switching costs for the buyers when the buyers can switch to other suppliers at zero or
minimum costs, then the bargaining power of buyers is high.
 Availability of substitutes - when close substitutes of the supplier's product is available in
the market the buyers will have strong bargain power.
 The size and number of suppliers - when there are more suppliers in the industry, the
buyers will have strong bargaining power.
 The buyer's knowledge about the product - when the buyers are more informed about the
product, they will be able to bargain with the suppliers for price.
 The price sensitivity of the buyers - when the buyer has low profit margin or low income,
they will be more price sensitive and will look for more low priced suppliers and they
will have strong bargaining power.
 When the suppliers product makes higher fraction of the total cost - the buyers will
bargain more and have more bargaining power when the suppliers input is higher
percentage of the total production cost.

The most factors are same for buyers and suppliers bargaining power but the situations are
opposites in influencing the bargaining power going up or down.

Why do you think best-cost provider strategy is the desired strategy? Provide examples.

Types of five generic cost strategies

COST DIFFERENTIATION

Broad Market Segment Broad

Overall low cost differentiation
strategy strategy

Best cost provider

strategy

Narrow Market Segment Focused

Focused low cost differentiation
(Niche Marketing) strategy strategy
Best cost provider is when the company uses best cost strategy providing differentiated product
from its rivals and it gives the customers value for their money. The firm uses best cost strategy
which is the mixture of all the other four generic cost strategy. This best cost provider strategy
works best when the firm can provide differentiated product from its rivals at a broad spectrum
and also at a low cost from its rivals. The customers will gain satisfaction in terms of quality and
price in this strategy. When the product is sold at a lower price from its other rival companies,
the price sensitive customers will easily get attracted to that product and when at a lower price,
quality and differentiation is also provided the value of the money spent on the product will
increase for the customers and thus they will be more inclined to buy from the company
providing the best cost in the market. The best cost strategy also works best when the company
wants to attract customers from different segmentation and can provide products at different
levels of price and can also meet the demand of the customers at all levels of the market
segmentation. Therefore, best cost provider strategy is considered to be the best strategy in
achieving broad spectrum of customers since the organization will be able to meet the demands
of its segmented markets by providing the product at the lowest price from its rivals with
differentiated product. Best cost provider strategy works best when customers are conscious
about the value of the product from economic pressure. In this situation they keep eyes for both
quality and price that company offers. When all the company provides same kind of product with
similar price, then the best cost providing strategy is best to capture the market.
Example: Toyota uses best cost provider strategy. It makes strategy to attract customers from
different segments of the society. It provides product which serves from low price sensitive
customers to high price sensitive customers. Toyota uses the strategy of providing broad
differentiated product to its customers at lowest possible price from its rivals and with the best
quality. Toyota ensures that the money of its customers are being properly utilized and spent for
the best product with high quality at lower price. Toyota also produces targeting buyers who
wants luxurious cars and are not sensitive to price. Therefore, Toyota is the best example of
utilizing best cost provider strategy as it ensures quality with low price.

Describe intangible resources and capabilities of a company using the VRIN test approach.

When a company makes a strategy for its organization it has to first analyze all of its resources
and capabilities. Based on its resources the company managers will determine the capabilities
and sustainability of the strategy in the long-run and whether or not the strategy will provide
competitive advantage for the company from its rivals. To analyze the sustainability of the
strategy, managers perform VRIN tests of its resources and capabilities.

V=Valuable R=Rare I= Imitable N= Non-substitutable

Valuable: whether the resource is valuable for the company to sustain in the competition? This
analysis provides all the details of the value that the existing resources will provide for the
company and how relevant the resources are for making strategy and to survive in the business
and have competitive advantage over its rivals. If the resource does not provide enough value to
provide competitive advantages over its rivals then the resources are not valuable. In order to
have sustainable advantage, the resources of a firm should be valuable.
Example: when a soap company produces soap but customers are not ready to purchase the soap
then it's not adding any value to the company. When consumer likes the soap and purchases it
that means the soap provides value to the company. It is the first test for a product to pass.

Rare: how rare is the resource from other rivals? When a resource is rare and only one or few
members in the industry possess it then the resource will help in making strategies which will
help in sustaining in the long-run and have competitive advantage over its rivals. When a
resource owned by a company is easily available and all the industry members have a hand on it
then it won't serve the purpose of achieving sustainable competitive advantage.
Example: when a fashion house like Aarong sells clothes and accessories which are not same as
other Fashion Houses products people get more attracted towards Aarong and ready to pay some
extra for the uniqueness.

Imitable: can the resource be easily copied? When a firm's resource and capability can easily be
copied or imitated then the strategy made by that firm won't be sustainable in the long-run. The
strategies will be easily copied by its rival companies and there will be no uniqueness. Thus the
company will not have sustainable competitive advantage over its rivals. When a firm's resources
or capabilities cannot be imitated or copied then the firm can make or build strategies which will
be providing sustainable competitive advantage for the firm.
Example Starbucks attracts more customers than its rivals because of the different coffee menu it
offers which cannot be imitated or copied by its competitors easily.

Non-substitutable: whether or not substitutes are available of the resource? When firm possess
a resource and substitutes are available then the strategy made by the firm might not provide
sustainable advantage in the long run and the company might not have competitive advantage
from its rival. But when a firm has a resource or a capability and substitutes are not available,
and then the firm will be able to make strategy which will help in providing sustainability and
competitive advantage.
Therefore the VRIN test helps in assessing the firm's resources and capabilities at valuable,
rarity, imitable and non-substitutable aspects. When the resources are assessed on these factors
there sustainability and competitive advantage over its rivals will be measured. When resources
pass all the four tests the strategy will provide sustainable competitive advantage since the
resources and capabilities owned by the firms are valuable, rare, hard to imitate and no
substitutable. Therefore VRIN tests are relevant to measure the sustainable competitive
advantage of the firm.
Explain the scope for vertical and horizontal integration.

Vertical Integration

Forward Integration
Merger

Acquisition

Horizontal Integration

Backward Integration

Vertical integration is a strategy where a company expands its business operations into steps on
the same production path, such as when a manufacturer owns its supplier and/or distributor.
Vertical integration can help companies reduce costs and improve efficiencies by decreasing
transportation expenses and reducing turnaround time, among other advantages. Vertical
integration ensures the following issues:
 Reduced suppliers bargaining power
 Ensures the availability of raw materials
 Well understanding about suppliers' product
 Creating sophisticated supply chain.
 Maintaining a good brand value
 Cutting costs in distribution system
 To increase product differentiation
 To gain better access to end users

In the vertical level when the firm decides to move forward or backward it is called adding more
number of value chains.
Forward vertical integration: Forward integration is a business strategy that involves a form of
vertical integration whereby business activities are expanded to include control of the direct
distribution or supply of a company's products. This type of vertical integration is conducted by a
company moving down the supply chain. Forward vertical integration lowers the distribution
costs for the producers and also allows more revenue from retailing business.
Example: Beximco used to manufacture RMG now it sells through retailing business under the
brand name "Yellow".
Backward integration: Backward integration is a form of vertical integration that involves the
purchase of, or merger with suppliers up the supply chain. Companies pursue backward
integration when it is expected to result in improved efficiency and cost savings. For example,
this type of integration might cut transportation costs, improve profit margins and make the firm
more competitive.

Akij beverage company used to buy mangoes from suppliers for its product Frutika production
costs Akij bought mango garden and moved backward in the supply chain and stal supplying
mangoes from its own garden rather than buying from other suppliers.
Horizontal integration is the process of a company increasing production of goods or services an
the same part of the supply chain. A company may do this via internal expansion, acquisition or
merger. The process can lead to monopoly if a company captures the vast majority of the market
for that product or service. Scope for horizontal integration;
 Expanding the geographical area for the company to collaborate with other company in
different nation.
 Including a new product to the company's business
 Adopting a new technology or system with ease by minimizing extra costs (Microsoft
collaboration with Skype).
 Operating costs minimization
 Capturing more market share

There are merger and acquisition in the horizontal integration.

Merger - when two companies decide to form one company and operate together this is called
merger.
Example: When Glaxo and SmithKline together formed GlaxoSmithKline. This merging into
one company helped them combine their customers and earn greater revenue.
Acquisition- An acquisition is a corporate action in which a company buys most, if not all of
another firm's ownership stakes to assume control of it. An acquisition occurs when a buying
company obtains more than 50% ownership in a target company. As part of the exchange, the
acquiring company often purchases the target company's stock and other assets, which allows the
acquiring company to make decisions regarding the newly acquired assets without the approval
of the target company's shareholders.
Example: When Banglalink entered the telecommunication industry in Bangladesh it acquired
Sheba telecom which was not doing well but to have some advantage it acquired the company
and entered the business.

How first Movers get advantage?

There are two types of market in business area: one is the existing market where there is al
demand and supply of the product with existing rivals and buyers. The other one is totally a new
area for business where the product is new and the demand for that product needs to be created;
this is called Blue Ocean strategy.
When a producer creates or innovates a new product there are some advantages for the
organization which they can use as a first mover in the market. Some conditions are described
below where first Movers get some advantage:

1. By creating a totally new market and demand for the product a fast mover gains customer
loyalty and creates brand value. Customer always becomes loyal towards the first
company in the market Example: In Bangladesh Grameen phone is a fast mover in
telecommunication industry and customers are still loyal after so many years with so
many new telecommunication companies who offers various services at a cheaper price
in comparison with Grameen phone
2. Get patent and legal rights over the products. As an introducer company, they get patent
right whereas other companies face barriers to enter the market. Example, first mover
advantage in pharmaceutical industry, the industry is heavily dependent on patent
protections.
3. First mover organization sets a technological standard level in the market, where it
becomes costly for the competitors to imitate the product. A first mover can gain
powerful advantages based on experiences overtime.
4. Example: Apple introduced completely new software which is called IOS for their
IPhone which is far better than any other smartphone software.
5. The switching cost of the product for the first mover is expensive for the customers.
Switching cost is not only related to money it also involves emotional, time and
satisfaction factors. When consumer's get attached with a product, they hardly switch
their taste to other company's product.
6. As a first mover the company leads ahead in the learning curve movement from their
rival which is a benefit and they also enjoy benefits from economies of scale.