JIA HO!

Jia Ho! (Let the Victory Prevail)

“Every Story always has a Beginning, a Middle and an End; But not always in that order” Jean Luc Godard

In business often times the language of conflict is used to describe the state of the business environment, especially when taking account of the competitive forces at play. There are 3 well recognised elemental states to a conflict;

  1. The time before the conflict, the period of onset
  2. Duration of the conflict
  3. Conflict resolution, the time between the end of the present conflict and the onset of the next

Or from an organisational sense;

  1. The time leading up to a product launch, change in strategy, entry into a new market… and the financing and planning of the product/service launch; the forecasting phase
  2. The time when the new or modified product or service is being delivered and the market reactions
  3. The time the market has settled, the organisation has found its place and a recognised market share

It’s probably reasonable to say that most people will only consider one and maybe two aspects of this cycle and that they are seen in isolation usually, moreover if all or some are viewed and considered that this is done in a linear fashion.

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FINNA demands that the single most important phase of the cycle is the forecasting phase and sets the dynamics for the rest of the cycle. All three parts of the cycle are important and each requires care and attention for success to prevail, but the forecasting phase is the most important by far. The other phases become or gain in importance as the un-planned for or unobserved dynamic factors come into play, and this is also very important to recognise and be prepared for. The future has not happened and so therefore we cannot honestly say with 100% confidence what will happen.

Good, indeed you should aim for Great, predictions rely heavily on the underlying data you have and have generated. But you should appreciate that in some situations, that in some markets, that conflict may not happen in the near future or that the market is immune from competitive forces at present, this normally applies to highly regulated markets. It all very much depends on the business environment. It’s the market reactions that should dictate how a forecasting phase should play out.

Traditional business models, the types normally taught in business schools the globe over, concentrate on the economists assumed view that business is about maximising profits and building growth. However, back in the real life situation’s among which we all find ourselves there will be competing objectives. Companies may lower their expectations on this basis, those that feel that maximising in this way is too hard, content themselves with a lower level of performance are said to be engaging in satisficing.

Reasons for this;  Owner/Managers running a business for income only, the hobby business

Business under short-term pressure who lose site of the long-term goals

Businesses with a broader social/public good linked to activities

Economists love the idea of the perfect market; many buyers, many sellers, a homogenous product. From a business perspective this is the very worst kind of market, buyers buy at the market rate and nobody can affect this rate. The only thing a seller can do is to sell an extra unit so long as the cost of doing so is less than the market price and the cost of manufacture/delivery is less than the selling price. In these kinds of markets no-one has an incentive to change their behaviour.

Markets will naturally move towards perfection over time and so companies find themselves seeking out a competitive advantage, the idea of seeing the market place as an area of conflict comes into effect. How does this play out?

Own-Price Elasticity;

Demand is generated by dropping the price below the market and even the cost value. If a good or service is reduced in price this has to be carefully thought through. If the percentage change in demand is less than the percentage change in price then cutting the price will reduce revenues.

Income Elasticity;

In an economy where living standards are rising a business that sells low-quality goods may find it has limited prospects. Demand typically will reduce in this situation. A business engaging in the luxury end of the market contrastingly may see that its prospects have improved.

Cross-Price Elasticity;

This kind of price elasticity normally comes about in markets which experience a level of inter-related and cross-functional sales e.g. cars and fuel. Fuel price rises significantly and the size of cars goes smaller. Many types of cross-price effects are very small and possibly short lived.

Elasticity of Supply;

This is measured as the percentage change in quantity of goods supplied divided by percentage change in price. If a good or service is difficult or impossible to increase production of, then at least in the short-term the price will rise.

Choosing which strategy can and often is a minefield but the common practice is to adopt Own-Price Elasticity as a way of generating revenues. Of itself this is a risky strategy at best and can lead to revenues reducing to a point where the business finds itself in serious trouble and may even close. The most appropriate way of using Own-Price Elasticity as a strategy for growth is to find a disruptive technology or methodology that radically changes the cost base of production.

Elasticity of Supply is almost entirely driven by the market and there is very little you can do to influence it.

The two main areas where competitive advantage can be gained is in the areas of Income Elasticity and Cross-Price Elasticity. In both cases strategic planning is key. Having an understanding of the market (the forecasting phase) is the single most important activity you can do.

FINNA takes account of many aspects and seeks out the goal. Essentially business activity and planning can easily be framed in the guise of a story. However, the beginning is not at the start, the true beginning is in the middle, in the ‘new’ market conditions.

By starting in the middle you will be forming a view on how you think the competition (for business success) will be played-out. This will inform your forecasting process and so the strategy. Which market strategy will you go for? This should only be driven by your aims, what are looking to achieve and when by? Difficult and complex questions to ask of yourself no doubt but ask them you must and then keep them at the forefront of you plans. By doing so you may realise that business growth, market domination and price competition are not actually what you need or want. You will be looking to achieve contentment for yourself, your business and your life.

Doing more, running on the spot just to stay put; Own-Price Elasticity is almost certainly not going to deliver on your aims.

Waiting for the market to determine your fate is to let loose the reins; this is to rely on Elasticity of Supply. Again unlikely to delivery your goals and speaks to those who want to be planned for rather to plan for themselves.

Cross-Price Elasticity requires great levels of market knowledge and intimacy. Great if you have the time and dedication, not so great if you don’t. The market will catch you out and your goals will be nought.

Income Elasticity is probably where the real strategic advantages can be gained from. This requires planning, intelligence, aptitude, ambition, aspiration and a lot of hard work. It also means that you must remove the ‘ego’, markets will become richer and poorer over time and if you are looking to geographically grow your business you will need market intelligence from that nation or area. Do not assume that what works well for you in your home nation will automatically transfer to a different location.

Bread in a bag sold in the UK generally comes in pack sizes of around 800g and 20 – 22 slices, go to down-town Delhi in India and bread is sold in many shops by the slice.

By planning from the middle out you take account of the market conditions, how your competitors might react and when the market might stabilise readying itself for the next round of conflict.

JIA HO! LET THE VICTORY PREVAIL! FINNA

Thanks for reading.

Philip

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