IN THE FIELD OF TECHNOLOGY DEGREE PROJECT
VEHICLE ENGINEERING
AND THE MAIN FIELD OF STUDY INDUSTRIAL MANAGEMENT, SECOND CYCLE, 30 CREDITS STOCKHOLM SWEDEN 2018,
Analysing Competition Barriers for the Aftermarket:
The Case of Volvo Cars’ Air Filter
DANIEL GINZBURG DENNIS MELIN
KTH ROYAL INSTITUTE OF TECHNOLOGY
SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT
1
2
Analysing Competition Barriers for the Aftermarket:
The Case of Volvo Cars’ Air Filter
by
Daniel Ginzburg Dennis Melin
Master of Science Thesis TRITA-ITM-EX 2018:201 KTH Industrial Engineering and Management
Industrial Management SE-100 44 STOCKHOLM
3
Konkurrenshindersanalys för eftermarknaden:
En fallstudie av Volvo Cars motorluftfilter
av
Daniel Ginzburg Dennis Melin
Examensarbete TRITA-ITM-EX 2018:201 KTH Industriell teknik och management
Industriell ekonomi och organisation SE-100 44 STOCKHOLM
4 Master of Science Thesis TRITA-ITM-EX 2018:201
Analysing Competition Barriers for the Aftermarket:
The Case of Volvo Cars’ Air Filter
Daniel Ginzburg Dennis Melin
Approved
2018-06-05
Examiner
Matti Kaulio
Supervisor
Mats Engwall
Commissioner
Volvo Cars
Contact person
Anders Lundell
5
Abstract
Original equipment manufacturers (OEMs) spend plenty of resources in developing products and establishing a profitable market. This includes time-consuming investigations, costly research and development processes, as well as a great deal of risk-taking. In comparison, certain companies specialise in fitting aftermarket merchandise to established markets of products. These companies copy existing aftermarket products as they supply the consumer an alternative that is often cheaper.
These are regarded as ‘will-fitters’. Not only do will-fitters act within the market without the need for a lengthy R&D process, or exposure to high risk, but they also seize market share and thereby compromise OEM part sales.
Will-fitters pose a concrete competitive threat to an automotive OEM in the aftermarket. The aftermarket is considered highly lucrative, as profitability is relatively high when compared to the car sales market. As will-fitters are active in the market, spare part market share is lost and pieces of a highly profitable market are seized by such competitors.
This study investigates relevant OEM competition barriers for will-fitter deterrence and analyses the effects of implementing these barriers. The findings are based upon a case study performed at an automotive OEM, i.e. Volvo Cars. The case focuses on the OEM’s engine air filter, which is currently highly exposed to competition from alternative suppliers.
Through combining theory regarding product development and entry barriers along with empirical findings at the case company, the study concludes six competition barriers that are relevant for the OEM as it faces will-fitters. These barriers are: patenting a utility, increasing the level of product complexity, raising the necessary financial investments, delivering additional value offerings, obtaining a strong customer value perception, and pricing competitively.
The study concludes each of the barriers’ potency in competition deterrence and discusses the effects of implementing those barriers on the products’ underlying costs. Finally, it is concluded that these barriers could be implemented in order to deter competition. However, none of the discussed competition barriers has shown to yield complete market dominance for the OEM, i.e. a market without competitors. Rather, an effect in the form of decreasing the amount of competitors has been noted. Admittedly, reducing the sheer quantity of active market players seems favourable to the OEM, but a direct correlation with increased market share cannot be concluded.
Key-words: Competition barriers, Entry barriers, Aftermarket, Automotive, Air filter, Competitive strategy, Competition deterrence, Will fitters
6 Examensarbete TRITA-ITM-EX 2018:201
Konkurrenshindersanalys för eftermarknaden:
En fallstudie av Volvo Cars motorluftfilter
Daniel Ginzburg Dennis Melin
Godkänt
2018-06-05
Examinator
Matti Kaulio
Handledare
Mats Engwall
Uppdragsgivare
Volvo Cars
Kontaktperson
Anders Lundell
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Sammanfattning
Tillverkare av originalutrustning (Original Equipment Manufacturer, OEM) spenderar stora mängder resurser för att utveckla produkter och etablera vinstdrivande marknader. Detta kräver ett stort risktagande då tid och kostsam utveckling utförs utan garanterade intäkter. Till skillnad från OEM-företagen finns företag som enbart fokuserar på att producera eftermarknadsprodukter till redan etablerade marknader. Dessa företag, benämnda “will-fitters”, kopierar existerande eftermarknadsprodukter och erbjuder kunden ett, oftast, billigare alternativ. Will-fitters affärsmodell utgörs därmed av att agera inom etablerade marknader vilket medför drastiskt minskade produktutvecklingskostnader samt lägre risk. Som en konsekvens av will-fitters intåg i marknaden reduceras försäljningen för OEM-företagen.
Will-fitters utgör därmed ett konkret hot inom eftermarknaden för en OEM såsom en biltillverkare.
Eftermarknaden är en lukrativ marknad då vinstmarginalerna är höga relativt nybilsförsäljning. Då will-fitters är verksamma i marknaden tar de marknadsandelar och därmed tappar OEM en del av en lukrativ marknad.
Denna studie undersöker konkurrenshinder relevanta för en OEM att implementera mot will-fitters och analyserar effekterna av att implementera dessa hinder. Resultaten baseras på en fallstudie utförd hos en biltillverkare, Volvo Cars. Studien fokuserar på biltillverkarens motorluftfilter, vilken är utsatt för konkurrens av will-fitters.
Genom att kombinera teori gällande produktutveckling och konkurrenshinder med empiri från det studerade företaget togs sex relevanta konkurrenshinder fram för en OEM som konkurrerar med will-fitters. Dessa hinder är: patentering av en produkt, öka produktens komplexitet, höja de nödvändiga investeringarna, bidra med ökat värde, förbättra kundens uppfattning av produkten, sätta ett konkurrenskraftigt pris.
Studien konkluderar konkurrenshindrens potential i att avskräcka konkurrens samt diskuterar hur implementation av hindren påverkar produktens underliggande kostnader. Slutligen påvisar studien att konkurrenshindren kan implementeras i syfte att avskräcka konkurrenter. Dock visar studien även att ingen av konkurrenshindren skapar en marknad utan några konkurrenter.
Snarare, så är den påvisade effekten att antalet konkurrenter minskar. Visserligen är en reduktion av antalet konkurrenter i marknaden positivt för en OEM men en direkt korrelation med ökad marknadsandel har inte kunnat påvisas.
Nyckelord: Konkurrenshinder, Barriärer, Eftermarknad, Fordon, luftfilter, konkurrensstrategi
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Table of contents
1 Introduction ... 12
Background ... 12
Purpose and research questions ... 13
Delimitations ... 14
Contribution ... 14
2 Method ... 15
Methodological approach ... 15
Pre-study and data collection ... 15
Performed interviews ... 16
Benchmark analysis ... 18
Literature review ... 18
Analysis ... 19
Generalisability ... 19
Validity ... 19
Reliability ... 20
3 Literature ... 21
Value creation and competition strategy ... 21
Entry barriers ... 22
The essential phases of the product development process ... 25
Appropriate barrier for each phase ... 27
Summary of barriers to product development ... 31
Analysis factors ... 32
4 Empirical setting ... 34
Case company: Volvo Cars ... 34
The aftermarket ... 35
The air filter ... 36
5 Findings ... 40
Air filter market overview ... 40
Competition barrier findings ... 45
6 Analysis ... 59
9
Patenting ... 59
Product complexity ... 61
Production investments ... 62
Customer perception ... 64
Non-product related value offerings ... 66
Pricing ... 67
7 Conclusion and discussion ... 70
Answering the research questions ... 70
Implications ... 75
Further research and criticism ... 76
Sustainability ... 77
8 Appendixes ... 79
Appendix A. Summary of entry barrier factors ... 79
Appendix B. Academic product development models ... 80
Appendix C. Air filter benchmark ... 82
Appendix D. Patenting benchmark ... 86
Appendix E. Interview guidelines ... 87
9 References ... 89
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List of figures
Figure 1: Concluded product development phases. 27
Figure 2: Competition barriers as fitted to the product development process. 32 Figure 3: Number of Volvo cars sold per year, last 5 years (Volvo Cars, 2018). 35
Figure 4: Air intake system in a Volvo Cars engine. 36
Figure 5: A typical engine air filter consisting of particle retaining media and a surrounding seal. 37 Figure 6: Automotive engine air filters of different types. 38
Figure 7: The sales channels for aftermarket air filters. 41
Figure 8: A double branded air filter, marked in Blue – OEM brand, marked in orange – Supplier
brand. 43
Figure 9: The proposed competition barriers. 45
Figure 10: The patented cabin air filter mount by Mercedes-Benz, in comparison competitors’
solution. 47
List of tables
Table 1. Performed interviews. 17
Table 2. Air filter benchmark sample. 49
Table 3. Average number of competitors per filter shape. 49
Table 4: Average number of competitors per filter frame manufacturing method. 51 Table 5: Number of competitors for different Volvo Cars engine air filters. 52 Table 6. An illustration of the index table upon which part pricing is based. 56 Table 7: Summary of competition deterrence and costs in relation to each of the barriers. 73
Abbreviations
B2B Business to business B2C Business to customer
C1MCA Vehicle Platform (C segment Mid-cycle action platform) EUCD Vehicle Platform (European C/D segment platform) IP Intellectual Property
IPR Intellectual Property Rights LDC Local Distribution Centre
OEM Original Equipment Manufacturer
PA Polyamide
PP Polypropylene PUR Polyurethane
R&D Research and Development
SPA Vehicle Platform (Scalable product architecture) VEA Volvo Engine Architecture
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Foreword
This report is a master thesis conducted at the school of Industrial Engineering and Management at KTH Royal Institute of Technology in Stockholm, Sweden during the spring of 2018.
We would like to express our utmost gratitude to our supervisor at Volvo Cars, Anders Lundell.
Anders contributed to this thesis with a tremendous amount of knowledge both regarding internal issues at Volvo Cars and in general. We would further like to thank our supervisor at KTH, Mats Engwall who assisted the researchers with his knowledge and experience in the academic field of Industrial Engineering and Management. Mats further supported the researchers in gaining a clear structure for the study.
Furthermore, we would like to thank everyone that supported the researchers and took time out of their day to be interviewed and contribute with their knowledge to this study.
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1 Introduction
In this chapter, the background of the research is presented and the problem, purpose and research questions are introduced. At the end of the chapter, delimitations and the contribution of the research are presented and discussed.
Background
There is often great pleasure in purchasing a new car. Consumers delight in the thought of driving a vehicle across open roads or just using it to get to work on a daily basis. However, owning a car also means taking care of its condition and making sure it is maintained according to manufacturer guidelines. Hence, it is an industry standard that vehicle manufacturers supply customers with a detailed servicing schedule, in which consumers may find the recommended intervals for inspection, liquid changes, and part replacements.
As the car rolls into its maintenance service, the relevant parts to be replaced are to be purchased.
These parts vary from filters, such as air and oil filter, to timing belts and even tires. Admittedly, a certain freedom is available to the consumer. She can either purchase spare parts distributed by the vehicle original equipment manufacturer (OEM), or purchase parts distributed by a third-party supplier. Even if the actual car owner could be indifferent to the origins of the spare parts, the workshop taking responsibility for performing the maintenance service has a similar freedom of choosing from different suppliers of spare parts. Accordingly, spare parts can be purchased, by either consumers or workshops, directly from the OEM or from a competing third-party supplier.
This has an effect on the competitive situation in the vehicle aftermarket. As more players enter this market, and consumers have complete liberty of choice, the OEM is set under pressure as it strives to sell aftermarket parts to its vehicles. In turn, this constrains the possible profit margins, harms the OEM’s market share, and can even compromise the customer experience, as third-party aftermarket parts may deliver impaired product performance.
This market situation, in which several suppliers compete in selling the same aftermarket spare part as the OEM, has been common for years. The situation is not specific for the automotive industry, rather, it is common for most industries where spare- and accessory parts are relevant. For instance, as early as in the late 19th century, consumers were faced with alternative choices of replaceable razors. Specifically, this was tackled by Gillette with patenting his products (Picker, 2010). In the printer industry, OEM printer manufacturers have faced multiple attacks from several third-party ink-cartridge manufacturers (Agrawal, et al., 2015). Even consumers owning a capsule espresso machine are today able to purchase alternative fitting capsules which are not manufactured or distributed by the OEM (Boyle, 2013).
OEMs invest plenty of resources in developing products and establishing a market. This includes time consuming investigations, costly research and development processes, as well as a great deal of risk-taking. In contrast, certain companies, specialise in fitting aftermarket merchandise to established markets of products. These companies will henceforth be regarded as ‘will-fitters’. Not only do will-fitters act within the market without the need for a lengthy R&D process, or exposure to high risk, but they also seize market share and thereby compromise OEM part sales.
13 Will-fitters pose a concrete competitive threat to an OEM in the aftermarket. The aftermarket is considered highly lucrative, as profitability is relatively high when compared to the car sales market. Many of the Fortune 100 companies obtain up to 40% of their profits from the aftermarket (Gallagher, et al., 2005). As will-fitters are active in the market, spare part market share is lost and pieces of a highly profitable market are seized by such competitors.
An optional retaliation approach from the OEM could be to introduce will-fitter competition barriers. By doing so, the competition could be deterred from acting in the market, and market share dominance could be retained by the OEM. However, introducing such barriers could also bring about negative consequences. For example, higher costs might be involved in blocking the competition, consumers may react to product changes, or production complexity might increase.
Therefore, it is of value to study the possible approaches for will-fitter competition deterrence as well as its effects on the OEM. In order to do so, a case study is performed within an automotive OEM. The case focuses on the OEM’s engine air filter, which is currently highly exposed to competition from alternative suppliers.
Volvo Cars’ air filter is at the current state manufactured with low-cost development and production at the highest priority. Hence, the investment required to produce this part is regarded as low (Volvo Cars, 2017). This allows alternative aftermarket suppliers, or will-fitters, to offer consumers an air filter with seemingly equivalent quality to that of an original Volvo Cars, as deterrence factors such as relevant patents or high manufacturing complexity do not exist. Thus, these alternative suppliers constitute competition to Volvo Cars within the market of spare parts.
By analysing the possible scenarios in which a competition barrier is introduced, a better understanding of the underlying mechanisms for tackling will-fitters can be obtained.
Purpose and research questions
The purpose of this study is to analyse the effects of implementing possible competition barriers in product focused markets, as an OEM faces will-fitters. The study targets findings from an automotive OEM, while focusing on the case of the engine air filter.
The purpose will be achieved by answering the following research questions:
Main: For an OEM company, what are the effects of introducing competition barriers towards will-fitters?
i) Which competition barriers are relevant in the will-fitter product focused context?
ii) What are the competitive and fiscal effects of introducing each of the various barriers?
a. How do the various strategies achieve competition deterrence?
b. How is the cost structure affected by the various barrier choices?
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Delimitations
The study aims to draw conclusions from a case study. In order to draw conclusions from the empirics of an industrial organisation, the study is delimited to a Swedish automotive OEM, namely Volvo Cars. More specifically, the research is delimited to the air filter element, while studying market share and economic factors. From this, general conclusions could be drawn to other standardised replacement parts, though ideally, further empirical studies concerning other companies should be performed in order to conclude generalisability.
Implementing a competition barrier consists of an array of different factors to be considered.
Delimitations are set around economic factors, such as costs, and effects on market share through competition deterrence caused by implementing the examined barriers. However, in order to implement these barriers, other factors such as production processes, supply chain and logistics integration are to be examined, and are thereby proposed as further research.
Analysis of the potential competition deterrence is performed in order to understand possible effects on market share and total sales of Volvo Cars' air filter. In order to increase original Volvo Cars filter sales, a common strategy could to increase consumers’ retention rate, i.e. the percentage of customers returning, to authorised dealerships. This study does not intend to go about investigating how to increase retention rate, but rather, focuses on creating barriers for market players to develop competing products.
Contribution
This study strives to contribute the current academic theory concerning competition barriers.
Moreover, this study aims to act as a practical decision support for Volvo Cars.
Plenty of academic articles have been written regarding the factors that affect new entrants’
decision making when facing a new market. Thereby, academics discuss the importance of certain advantages and how market incumbents may put up barriers for new entrants in order to deter them from competing in the market. The academic literature does not seem to have covered to a similar extent scenarios in which a market incumbent is facing a competition in the form of will-fitter threat. As will-fitters consider copying products that exist in the market and adapting those to the original equipment manufacturer’s products, they face similar factors as those who are new to the market. However, as will-fitters are already active in the market and are acquainted with it, they possess a certain advantage, which makes their sort of competition different to that of new entrants.
This study intends to shed light on such competition and the method a market incumbent might utilise when competing with a will-fitter.
Furthermore, this paper concerns Volvo Cars’ aftermarket competition, as it specifically analyses air filter sales and will-fitters. The aim is to contribute with practical information regarding possible approaches Volvo Cars can adopt when facing will-fitter competition in the aftermarket.
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2 Method
Methodological approach
This study adheres to an iterative approach. Thereby, the problem formulation, purpose, and research questions are repeatedly reviewed and altered as knowledge is accumulated throughout the study (Blomkvist & Helin, 2015).
The purpose of this study is to analyse the effects of implementing possible competition barriers in product focused markets, as an OEM faces will-fitters. In order to fulfil this purpose, empirics are gathered from a case study. This means a practical example from the industry is chosen and analysed in order to determine whether a theory’s propositions are correct or whether some alternative set of explanations might be more relevant (Yin, 2003). By performing a case study, the phenomenon is studied in its natural setting, such that the context is obtained and a deeper understanding of the problem is facilitated (Collis & Hussey, 2013). Further, the case study enables exploratory investigations (Voss et al., 2002), which fit this study’s purpose as it aims to explore approaches for facing will-fitter competition based on a practical industry example.
In order to answer the research questions and eventually fulfil the purpose of this thesis work, the case study consists of several steps (Collis & Hussey, 2013). The first is naturally, the case selection. By analysing the business case of Volvo Car’s air filter, we strive to obtain an empirical view of the possible approaches an OEM can adopt regarding aftermarket competition barriers as well as the consequential effects. Thereafter, the case study is to include preliminary investigations, or a pre-study, as well as data collection (Collis & Hussey, 2013). This is followed by analysis of the data, performed with an appropriate framework obtained from the literature review.
Pre-study and data collection
When performing a case study, it is crucial to understand the context (Collis & Hussey, 2013).
Therefore, detailed information is to be collected regarding the chosen case, and specific time is to be dedicated for this purpose (ibid). A comprehensive pre-study assists in obtaining a better understanding of the problem and enables the formulation of a preliminary problem definition.
This, later on, has an effect on the entire trajectory of the research.
The research was conducted at Volvo Cars, as in total, access was given to the organisation for a period of 5 months. This enabled experiencing the organisation internally and being present during working hours in order to gather relevant information and to conduct the study. During that time, empirics were gathered from both formal and informal conversations and discussions with company employees. This allowed the researchers to obtain profound context to the problem, as the study was discussed with plenty of employees with internal insight.
The researchers were present in company presentations, formal and informal tours of various departments, as well as some research and development meetings. Conducting 40 hour weeks at Volvo Cars allowed the study to obtain its empirical ground as access was given to relevant personnel and information systems.
16 In order to understand the chosen case of Volvo Cars’ air filter, the technology and resources invested in the product were studied. Thereby, scientific knowledge regarding the principles of the engine air filter were reviewed. Moreover, knowledge regarding engine components which integrate with the air intake system were gathered in order to obtain an overview of the system’s requirements, constraints, and the underlying product design.
Further, the current market situation is investigated, such that other OEMs’ solutions along with their offerings and number of competitors could be listed. In addition, the market investigation consists of establishing Volvo’s market share in an attempt to construct an estimation of potential market share growth.
As the study aims to investigate the effects of implementing various will-fitter competition barriers, the implications on costs and pricing, which constitute the profit margin of the air filter are studied.
This helps to analyse the current underlying strategy of the product along with the potential improvements that can be obtained.
To obtain the aforementioned knowledge, a qualitative analysis is done and is combined with quantitative data, as a strategic overview along with a market analysis is obtained from various resources:
• Interviews with technical specialists, project leaders, product managers, product purchasers, strategic planers, external manufacturers and suppliers, cost estimators, sales managers and intellectual property attorneys.
• Internal documents and lectures regarding the studied topic.
• Study visits to air filter suppliers’ facilities and workshops with technical specialist.
• Online e-commerce wholesalers
• A benchmark study, utilising two external databases, regarding existing air filter solutions of competitors and corresponding competition to create an overview of the market.
• A second benchmark study, utilising an external database, regarding the number of competitors to a patented product.
Performed interviews
The empirical findings in the thesis is based, largely, on interviews with specialists in a wide range of fields relevant to the case. To provide an overview of the performed interviews, Table 1 below, presents the role of the interviewee and the discussed topic.
17 Table 1. Performed interviews.
The interviews were conducted mostly at Volvo Cars and lasted between one and two hours. A semi-structured interview approach was taken in order to allow interviewees to discuss issues which they believe have a critical effect on the study. Moreover, semi-structured interviews are suitable when an exploratory study is conducted, as it allows the researcher to pose additional questions in order to explore new issues or when more detailed information is required (Collis &
Role Interview’s main subject
Air Induction System Project Leader Case presentation Technical Specialist Air Induction System Case presentation Aftermarket Product Manager, Service Parts Service parts strategy
Air Filter Manufacturer, CEO Production costs and sales Air Filter Manufacturer -
Technical Specialist, Production Manager
Production methods and bottlenecks
Price Manager Pricing strategy
IPR Lawyer Patenting
Senior Legal Counsel, Ipr Patenting and vertical agreements Sales & Earnings Manager Competitive strategy and market analysis,
Senior Business Analyst Competitive strategy and market analysis Product Manager Market situation (clients and workshops) in
Sweden Manager of Product & Logistics, Volvo Sweden
Spare Parts, Sales
Sales channels
Retail Planning Manager Dealer contracts
Senior Communications Manager Marketing
Sales & Earnings Manager Sales, market share and retention Senior Business Analyst Sales, market share and retention Customer Service Manager - Italy Market situation (clients and workshops) in
Italy
Technology Innovation Manager Benefits with patenting
Senior Patent Attorney Benefits with patenting
Cost Estimator Production and material costs
Parts Sales Manager Market situation (clients and workshops) in USA
18 Hussey, 2013). For further examination of the contents of each interview, see Appendix E, which contains the interview guidelines.
The interviewees were chosen with the concept of triangulation in mind. The professional knowledge of interviewees often overlapped, such that similar questions could be posed to different people. This allowed for higher reliability of the results and broadened empirical findings. The interviews were selected in order to obtain an overview of the problem and the possible solutions according to the study’s delimitations described in Chapter 1.3.
Benchmark analysis
In order to present an overview, and further the researchers’ understanding, of the air filter market, a benchmark analysis of the air filter market was conducted. The benchmark visualised the different types of air filters currently present in the market and the corresponding competition.
The benchmark study utilised two databases. First, A2Mac1 (A2Mac1 SA, 2018) consisting of digital models of disassembled cars in which it was possible to see images of air filters from different car models and the corresponding part numbers. The second database, TecAlliance (TecAlliance GmbH, 2018), provided the number of companies that provided an air filter fitting to a certain car and engine. By combining these two sources, it was possible to categorise the filters and judge the corresponding number of competing companies.
Since the number of car models in the world is vast, the benchmark study could not include the entire market. Hence the study is based upon a sample of the market. By selecting a sample of the market, the benchmark might not be representative of the entire market. For this reason, measures have been taken in order to reduce the risk of a biased sample, see Chapter 5.2.2. for further description of these measures. Furthermore, since the benchmark is based upon the two aforementioned databases, any errors in those databases would propagate into the benchmark study as well.
Another similar but smaller scale benchmark is performed for an industry example of patenting.
This benchmark analysis utilised the TecAlliance database, and similar measures to those presented above were taken to reduce the risk of bias.
Literature review
In order to intertwine the empirical findings with existing academic literature within the subject and give the study a theoretical context, a continuous literature review is performed throughout the study. As literature is gathered, the research is given a theoretical framework, which in turn allows for a deeper and more exhaustive analysis. The literature review does not aim to lay out all previous research within the field, but rather provide a critical analysis of the theory and challenge it on the background of the obtained empirical findings.
As the research questions focus on will-fitter competition barriers, relevant literature revolves around competitive strategy, entry barriers, product development processes, profit, and competition deterrence.
19 The literature study was performed by reviewing published academic articles, books, and reviews, along with management consulting reports. KTH’s library was utilised in order to gain access to printed material, while google scholar and KTH e-library have been used for online accessible material. Due to the industry’s high relevance for management consulting companies, plenty of relevant material from consulting companies could be found and analysed for this study.
Analysis
In order to extract the relevant information from the gathered material, the information is analysed.
Information gathered from empirical findings is sorted according to a proposed framework developed in this paper and gained knowledge is intertwined with relevant academic theory in the subject. In an attempt to deliver an analysis of the possible approaches for competition deterrence, a range of different scenarios is to be studied. This, while critically analysing the relevant theory within the subject. Thus, the analysis contributes to broadening the theory within the subject and challenges it on the basis of contemporary empirical findings.
Hence, the study answers the research questions as it regards:
• Possible will-fitter competition barriers for OEMs.
• Their respective fiscal and competitive effects.
Generalisability
As the research was performed in the form of a case study and thereby investigated a single example of a phenomenon, it is difficult to claim generalisability without further research consisting of a wider range of examples. Such examples would preferably include different industries and types of products.
However, given similar circumstances, this study should give a fair indication of the possibilities regarding will-fitter competition deterrence. Similar circumstances in this case could be the industry and the consequent sales and supplier relationships, the type of product and consequent features as well as production techniques. Hence, the results obtained in this study are probably more generalisable to industries utilising engine spare parts as opposed to, for example, the consumer electronics aftermarket.
Validity
The method is chosen with the concept of validity in mind. As validity revolves around measuring the correct things and gathering the appropriate data in order to answer the research questions (Collis & Hussey, 2013), the interviews performed were always initiated with the study’s research questions. Moreover, the choice of people to interview was performed with the underlying purpose to obtain an exhaustive view of the problem and possible solutions. In order to not miss any aspect of the studied subject, plenty of interviews were performed with various stakeholders, such that the variety of the study’s sources increases its validity.
The secondary data, such as scientific reports, company websites and annual reports, was obtained from objectively reliable, and recently updated sources. Idea development was performed by
20 combining interviews and secondary data collection with a research diary, where the latter was used to structure observations and ideas throughout the study.
In order to further increase validity of the findings and the gathered material, a scheduled meeting with the commissioner of the study was held periodically. There, gathered material was presented in order to ensure satisfactory results, and further ideas as well as research trajectories were developed together.
Moreover, the thesis has been conducted on-site at Volvo which has further enabled the understanding of the context in which the thesis is set. It also aided in the gathering of empirical findings through more informal means than interviews, such as tours of the facilities, conversations with employees and access to the analysed products.
Reliability
The accuracy of the study, i.e. conducting the study in the right way (Blomkvist & Helin, 2015), is referred to as the reliability. A highly reliable study would, thereby, yield the same results if repeated (Collis & Hussey, 2013).
In order to achieve reliability, data triangulation was performed. By posing similar questions to several interviewees and thereby receiving the same information from several sources the risk that the acquired information was biased was reduced. Furthermore, by performing interviews with employees from several departments and companies which spanned a large part of the value chain, the researchers’ understanding of the value chain mechanism increased, which eased in interpretation of the acquired information.
Moreover, all interviews were concluded with a summary from the interviewer’s point of view, such that the interviewee could thereby resolve any misunderstandings. The interviews were also adjusted in the line of questioning to suit the interviewees role and knowledge area.
The interviews were semi-structured, which enabled a further understanding and depth of the acquired information. However, because a semi-structured interview enables the interviewee to go off on a tangent or lead the discussion into an area which might not have been explored by other researches attempting to repeat the study, it might compromise the reliability of the study somewhat.
Furthermore, a benchmark study was conducted which was based upon external databases. As external databases were utilised, the underlying sources encourage repeatability, as they would present the same numbers if the study would be repeated for the same air filters. However, since the selected air filters were a sample of the market, another researcher might select other filters, which might yield differing numbers.
21
3 Literature
In this chapter, relevant academic research and theory are presented. The literature provides a base for the analysis of the empirical findings and further helps to provide answers to the research questions. As the research questions regard will-fitter competition barriers, more general literature regarding competition strategy and a background to value creation are presented in order to get an overview of the topic. This is followed by a literature review on the definition of entry barriers and the underlying factors which constitute these barriers. Thereafter, product development literature is presented, which aids in constructing a generalised model for product development. By targeting competition hindrances towards the steps of the generalised product development model, relevant competition barriers are obtained. Lastly, the factors with which each barrier is analysed are discussed.
Value creation and competition strategy
Industrial companies create a certain value through their operations. A company can offer added value by delivering a service, producing a product, or creating a mixture of the two. The company’s strategy describes the sort of value that the company chooses to offer, along with the customers it intends to address (Engwall, et al., 2017). Thus, a company’s strategy could have substantial effects on the competitive environment of the market (Pehrsson, 2009). It is hence essential for a successful strategy to include an appropriate approach for competing in the market.
In principal, there are three competition strategies a company can choose from (Engwall, et al., 2017). Firstly, competitiveness can be created by product leadership. Simply put, a company can focus on creating the product with the best qualities in the market and thusly, create a strong brand as well as be related with a quality offering. Usually, this strategy requires substantial investments in innovation and product development, and might require charging higher prices in comparison to competition (Engwall, et al., 2017).
Secondly, a company can obtain its competitive advantage from operational superiority.
Operational performance refers to an organisation’s processes, such as reliability, production cycle time, and inventory turnovers. Operational superiority could have a direct effect on business performance measures, such as market share and customer satisfaction (Voss, et al., 1997). In this approach, solutions are often standardised, economies of scale are utilised (Nath, et al., 2010), which in turn leads to lower costs and customer attraction is obtained due to lower pricing.
Lastly, a company’s competitiveness can be achieved through customer intimacy. This approach advocates delivering customised solutions to customers, such that they answer to each and every customer demand. Production is obviously done on demand, which complicates the underlying processes and requires high flexibility (Engwall, et al., 2017). This approach might be costly, but the positive aspects are long term customer loyalty (Treacy & Wiersema, 1992). These sort of companies differentiate between the profit made on a single transaction and that made by a lifelong loyal customer. Hence, they are also more willing to endure higher production costs.
Though these strategies focus on different aspects of the product and on creating advantage through allocating resources in different ways, academic researchers argue that most competition strategies are a certain mixture of the aforementioned approaches (Engwall, et al., 2017). Nevertheless, it is required to choose a discipline to focus on in order to become an industry leader (Treacy &
22 Wiersema, 1992). Thereby, it is important to develop core competencies for a company as they can set the base for the company’s competitive advantage (Prahalad & Hamel, 1990). This choice should be aligned with the company’s capabilities, culture, and market competitiveness.
Will-fitters’ value creation
It is important to understand the competition’s, i.e. the will-fitters’, value creation method as one strives to tackle it. In order to survive sustainably, companies are required to possess an established revenue model (Engwall, et al., 2017). By gaining revenue on the company’s generated value and ensuring a profit from that revenue, a company can continue operations and even encourage growth. Revenue models vary from unit sales to continuous subscriptions, but relevant and attractive offerings are the essence of successful operations.
The strategy of certain companies is to copy and sell products similar to ones already in the market (Gallagher, et al., 2005). By acting in an established market and offering merchandise which complement existing market products, one can ensure continuous revenue. Companies that focus their revenue model on copying products, often gain their advantage through lowering costs and providing a lower price to the customer (Gallagher, et al., 2005; Engwall, et al., 2017). In the pharmaceutical industry, such companies are referred to as generics (Guedri & McGuire, 2011).
Whereas within aftermarket parts they are often referred to as will-fitters (Gallagher, et al., 2005).
The focus of this study is the deterrence of will-fitters i.e. deterring companies trying to copy the incumbents’ product.
In order to outperform the competition, mainly the incumbent OEM, will-fitters need to establish a persevering difference (Porter, 1996), such that its relative advantage is sustainable and maintains the company in a leading competitive position. Mostly, this is obtained by lowering costs, perhaps even quality, and delivering customers with an easy and competitive alternative (Gallagher, et al., 2005).
Entry barriers
Generally, entry barriers are defined as barriers that deter entry into a new market or an industry (McAfee, et al., 2004), meaning that the entrant company has not had experience with the market or industry prior to entry. However, when discussing will-fitters they often act within an industry.
For example, they might produce ink-cartridges that fit a range of different printers from a range of OEMs. This means that the will-fitter is already acting within the ink-cartridge industry or market. An OEM might wish to deter will-fitters from producing ink-cartridges fitting the OEMs printers, i.e. put up barriers against will-fitters already in the market regarding producing cartridges fitting the OEM’s specific printers.
Both a company active in a certain industry and one that is regarded as a new entrant would go through similar processes as they consider launching a certain product. Both would have to consider which competing products exist in the market, consider the investments required, their own competitive advantage and so forth. Admittedly, a will-fitter, which is a company already active in the market, has certain advantages in comparison to a new entrant. These advantages might be experience with producing similar products or with the market environment. Nonetheless,
23 as will-fitters consider introducing a new product, they are to regard barriers which are much similar to those for a new entrant.
The discourse about entry barriers has brought with it various definitions of the concept through the years. In early literature, the term entry barrier was discussed by Bain (1956), who defined it as an advantage obtained by established firms in an industry over potential entrants, which is reflected in the extent established firms can raise their prices over competitive levels without attracting additional entrants to the industry. The three main areas recognised by Bain (1956) as entry barriers are economies of scale, product differentiation and absolute cost advantage.
Stigler (1968) questioned Bain’s definition, as he challenged scale economies as a barrier to entry.
Rather, Stigler offered a narrower definition and argued that the definition of barriers to entry is the cost of producing which must be borne by firms seeking to enter an industry but not by incumbents. Though the two scholars disagree on exact definition, both regard cost advantages as a core barrier to entry. Even later scholars, such as Carlton and Perloff (1994), focus on the costs incurred by those entering the market, though they emphasise the dependence on time of entry.
There have been numerous of scholar who proposed interpretations of entry barriers, but a broad consensus regarding the definition of the concept does not seem to exist (McAfee, et al., 2004).
Both Carlton (2004) and McAfee et al. (2004) emphasise that the earlier theories are too static.
They argue that barrier to entry models that only include short and long term effects are too simple and that more attention should be focused on timing and dynamics in relation to entry barriers.
Carlton (2005) even emphasises the importance of considering the industrial context when discussing barriers to entry, as the definitions varies accordingly.
As entry barriers consist of multiple underlying factors, it is of relevance to list those. Hence, regardless of exact definition of the concept, an overview of possible barriers to entry can be established by regarding the subcomponents which make up the barriers. Therefore, certain academics have averted from the endeavour to deliver an exact phrase which characterises barriers to entry, but rather, have contemplated on its constituents.
Entry barrier factors
Various academic studies have strived to pinpoint the exact factors or aspects that make up market entry barriers. In their attempt, they have concluded models that both confine the term, as they limit what barriers are, and divide it, in different ways, into its elements.
Karakaya and Stahl (1989) questioned and investigated the six barriers to entry defined by Porter (1980): Cost advantages of incumbents, product differentiation of incumbents, capital requirements, customer switching costs, access to distribution channels, and government policy.
There, they concluded that not only do these barriers vary in significance, but this variation also depends on the ambient market conditions and industrial context. Consequently, Karakaya and Stahl (1992) concluded that a broader list of entry barrier factors was needed, and obtained a list of 25 factors, some of which resemble those described by Porter, see Appendix A. In a study from 2002, Karakaya surveyed 93 industrial companies in order to grade which of the 25 barriers to entry listed in the survey are the most significant. The results yielded that barriers such as incumbents’ cost advantages, the capital requirement needed, and incumbents’ superior production
24 processes are most deterring to potential entrants (Karakaya, 2002). On the other side of the scale, entrants are least deterred by issues such as government requirements, incumbents’ advertising or high profit rates.
The purpose of competition barriers is to discourage competition (Aaker, 2011). Hence, researchers strive to list the factors which achieve this goal. Aaker lists 12 factors which he argues create competition barriers, see Appendix A. Among these factors, much similar to both Karakaya and Porter, are proprietary technology and investment levels. However, Aaker seems to focus more on the importance of value creation through branding, as 4 out of the listed 12 factors regard benefits associated with an incumbent brand.
There are researchers that intend to simplify the division of underlying aspects to market entry barriers. Pehrsson (2009) proposes that the concept of barriers to entry can be measured upon merely two aspects, product differentiation and market entry timing. Thereby, he acknowledges the contingency approach, admitting every industry has its own specific factors which affect the strategy of market players. However, according to proposed model, regardless of industry, the various factors can be embedded in the two previously mentioned aspects of barriers to entry.
Pehrsson claims that factors such as product range, innovation, costs, price, market share, and additional services are all part of product differentiation. Further, firms adapt their entry strategy according to existing barriers (Pehrsson, 2009) and therefore entry timing is a crucial aspect of its own. Thereby, Pehrsson claims product differentiation is accordingly of more importance for a later entrant in comparison to an early entrant.
Other researchers argue that a useful framework for entry barriers should be more complex. Kerin et al. (1992) argue that though the importance of market entry timing, or the “first-mover advantage”, is not to be disregarded, it is a complex phenomenon and should be treated as an additional factor to other entry barriers. It was Lieberman & Montgomery who even previously stated: “for any given firm, the question of whether early or late entry is more advantageous depends on the firm's particular characteristics” (Lieberman & Montgomery, 1988). In other words, an early market entry does not necessarily pose an advantage, as dependent on firm skills, some companies might enjoy the privilege of entering a market where the potential is already demonstrated.
Accordingly, other aspects besides market entry timing are considered in the framework proposed by Kerin et al. These aspects include the attractiveness of the market, i.e. the opportunities existing for market entrants, the competitive strategy chosen by each of the market players, as well as the advantages a later entrant enjoys.
It is obvious the academic discourse regarding entry barriers is vast, and thereby, plenty of researchers have tried to develop tools to better understand the concept. Companies considering to compete in a market need to regard several factors as they determine whether they wish to compete in that market. The factors to be regarded are plentiful, as a few examples are: the competitive environment of the market, the potential growth, the expected revenue etc. For example, incumbent companies might possess crucial assets, which are difficult to replicate. Further, customers might not be willing to alter their purchasing habits. All of these examples pose difficulties for those wishing to enter a certain market and act as deterrence factors.
25 The focus within the academic discourse, which includes controversy among researchers, is often set on entry into entire markets. Thereby, the question often analysed is whether a player should enter a new market of products and offerings, which was not a part of its portfolio previously.
Thereby, literature regarding competition barriers for those who already operate in a market is scarce. Entering the market as such is less of relevance for this study’s focus, but rather the development of specific competing products by incumbents. Hence, there is a need to construct a solid framework for competition deterrence through barriers, in which the product itself should be in focus. As every product is initiated in a product development process, targeting this process when constructing a barrier framework would tackle the market players’ will to develop the product and act as direct competitors.
The essential phases of the product development process
The product development process is the activities and decisions from the time an idea is created to a commercialised product (Craig & Hart, 1992). Naturally, the process’s constituting steps can be defined and divided in different ways. Simply, one may divide the process into: 1. Market opportunity, i.e. how profitable the new product may be 2. Development and production, i.e. how fast and/or complex can creating the product be, 3. Commercialisation, i.e. how can we succeed in selling the product (Pragmatek, 2018). Despite the clarity of this process division, this method has it flaws, mostly when granularity is required.
As one strives to obtain a holistic approach towards competition hindrance, it is beneficial to regard the different steps towards product development. By inspecting those steps, it is possible to evaluate various obstruction methods, such that market competition is deterred. To exemplify, as mentioned above, product complexity is one of the initial aspects for a new entrant to investigate when entering a market, i.e. how complicated is the product to develop? Can we develop a fitting solution? Is it worthwhile? Hence, by creating a hindrance to develop a fitting product, competitors could be deterred from competing in the market. Such hindrances can be targeted towards each of the steps of product development and create barriers for competition to operate in the market. Thus, the question remains, what are the steps towards a commercialised product?
In order to obtain an overview of these steps, a literature review is presented below. The purpose of this review is not to produce a correct model of how product development occurs. But rather to present the critical steps from idea to commercialised product where competition barriers could be placed and thereby deter competitors from producing a competing product. Therefore, whether the product development process is sequential, iterative, overlapping and so forth is not considered, rather the focus is to highlight the steps that researchers have established as necessary to be undertaken in a product development process.
Kotler argues the product development method is an eight-step process, see Appendix B (Kotler &
Armstrong, 2014). Idea generation is where potential future products are born. Companies utilise internal sources, such as R&D workshops and employee-customer relationships, as well as they utilise external resources, such as suppliers, distributors, or competitors. Thereafter, ideas are screened based on market need and capabilities of the company. A concept is developed to investigate technical feasibility, and marketing strategy is established to conclude customer
26 segmentation, sales plan etc. Subsequently, an analysis of the business’s costs, price and profits is performed, such that the product’s business case can be justified. According to Kotler, the business case is followed by a product development phase, in which R&D engineering construct a physical product, and production processes are defined. Accordingly, all that is left is to test the marketing strategy and commercialise, i.e. introduce the product to the market with the decided price, marketing strategy and value offering.
Other academics argue for a somewhat more concise model. For instance, Pugh (1986) has developed a product development model that begins and ends in the market place, see Appendix B. According to Pugh’s model, a product emerges from a user need that exists in the market, and is eventually launched with the market needs in mind. He further acknowledges that developing a product requires an iterative process, in which the different steps are regarded repeatedly until product launch. After the need is identified, one can go about specifying the specifications that fulfil this need, together with a development of a concept. This is iterated as a detailed design is established, such that a final product is realised. Thereafter, a manufacturing process is established, followed by a selling plan and execution.
Even as early as in 1962 (Asimov) it was recognised that similar steps lead to a successful product development, see Appendix B. No product is initiated without a market need, followed by feasibility studies and design development. Thereafter, according to Asimov, construction planning, i.e. the tools needed, facilities, personnel and control are of significance in the way towards a product. Subsequently, the next stage includes planning packaging, warehousing, and promotional activity for the distribution. Similar to above described models, product development includes commercialisation planning of operations. Asimov adds an additional stage, which is not regarded by all models, of retiring the product. Whether this phase is necessary for product development is not definitive, as later models, though not all, seem to exclude this phase (Kotler
& Armstrong, 2014; Craig & Hart, 1992).
Even newer approaches that combine an agile way of thinking include similar stages towards a product. Cooper and Sommer (2016) discuss the gained flexibility of combining the above discussed steps with an agile stage-gate system. By maintaining the ever changing customer needs in mind, and adapting according to continuous feedback, each of the product development steps can be adjusted to market conditions. Moreover, in comparison to the previous described models, this model does not follow a linear rigid step-by-step process. Rather, this model achieves competitive advantage for companies through an iterative feedback loop (Cooper & Sommer, 2016). Nonetheless, the essential steps of product development are still present, see Appendix B.
An idea is created from a visible user need, a concept is developed, followed by the analysis of the potential business, as well as a development of technical as well as marketing solutions. After the process for manufacturing and selling is defined, it is possible to launch the product.
When regarding product development, it is not uncommon to follow an industry standard. Hence, one can investigate the British design standard, which outlines “an idealised product evolution”
(Craig & Hart, 1992), see Appendix B. There, the initial phases consist of motivating the product creation, both in the manner of market need and the form of technical feasibility. Thereafter, it is possible to develop a design, and plan the manufacturing process. Distribution is a crucial phase
27 according to the standard, as it determines the means to be used in order to reach the customers.
Lastly, the operation of producing and selling the product is engaged, followed by a phase of disposal of the product and its necessary tools.
To conclude, product development models do indeed vary, as academic researchers deduct various amounts of steps in the process, somewhat different focus, and even controversy regarding aspects such as linearity versus iterative loops. Nevertheless, the essential steps, or building blocks of the product development model are repeatedly the same. All focus on gathering market information, developing a design concept, developing a technical solution, obtaining a process for operation, creating a marketing strategy, establishing distribution, and finally, selling as well as realising the product’s profit, see Figure 1. These steps are common to all described models, and could be seen as a consensus among academics, as these steps appear repeatedly.
Figure 1: Concluded product development phases.
Appropriate barrier for each phase
By targeting hindrances towards these phases, deterrence is created towards competitors’ product development. Hence, competition deterrence could be obtained by creating an entrant barrier framework based on these steps, such that it targets each and every common step, as described below.
In order to fit an appropriate barrier to each of the essential phases of product development discussed above, there is a need to understand these phases, their purpose and their weaknesses.
Academic theory regarding competition barriers is utilised for the purpose of concluding an appropriate barrier.
Market and business analysis phase
Any product can trace its roots back to an initial idea. But, since ideas are often plentiful and resources are not, companies have to choose a limited number of them (Kotler & Armstrong, 2014, p. 287). In order to be able to prioritise and screen ideas, companies first have to evaluate whether or not there is a customer need for the potential product. Most companies employ a formalised process for conducting such an analysis (Barczak, et al., 2008).
The analysis generally includes factors relating to the market and technical requirements of the product. Market factors include an inspection of market size, the potential market growth, possible margins and the general competitive landscape. Technical factors that are analysed as a part of the initial business analysis relate to the product itself as well as its features (Kahn, 2012, p. 10; Cooper, 2008). The product has a direct effect on the capabilities necessary in the form of R&D and production capacities. The concluded analysis should give a preliminary indication regarding whether there are any obstacles in the product development process and guide the company in reaching a go or no-go decision on the project.
28 The market and business analysis phase includes a somewhat holistic analysis of all of the subsequent steps in the product development process. Therefore, no direct barrier can be set in order to create hindrance for this specific phase. Rather, by adapting barriers to each of the following phases, the entire business case is faced with barriers and competition deterrence could be achieved. Hence, the focus should be set on creating barriers for the subsequent steps described below.
Patenting as a barrier to the Concept design phase
As the customer need is established, a product concept is to be created from the preliminary product idea. The product concept differs from the idea in that it demands a much higher level of detail and should be stated in consumer terms (Kotler & Armstrong, 2014). This concept can be created only in case there are not any obstacles, or barriers, that prohibit it.
In case a company is interested in creating a competing product to one already in the market, the incumbent product will be assessed in detail (Raman & Chhajed, 1995). This initial assessment should uncover any obstacles in producing a similar product to the one already in the market.
An early obstacle, or barrier, for the development of a similar product is an incumbent product which is or contains proprietary technology (Karakaya, 2002). By patenting a utility or its underlying technology the copying of a product is prohibited by law. Hence, a direct competition barrier to this product development phase is patenting.
Notice that though patenting indeed acts as a barrier, it does not completely deter competition.
Patents restrict entry rather than prevent it (Langinier, 2004). Competitors still possess the possibility of creating a similar product without infringing on the patent. At times, companies can achieve similar functioning through a different technical solution.
Product complexity as a barrier to the Research and Development phase
If the product concept is deemed to meet the requirements, it will enter the product development phase. While the product concept might have been just a crude mock-up, the goal in this stage is to create a fully functional product, which requires a large engineering effort. Thus, proceeding into the product development phase requires a substantial investment compared to the earlier stages.
(Kotler & Armstrong, 2014, p. 291).
A barrier can hence be posed to those wishing to compete in the market through complicating the level of necessary research and development. As entrants attempt to create a competing product to a product already in the market, its functionality or incorporated offering should not be inferior to that which already exists. MacMillan et al. (1985) stated that product complexity, which entails combining several skills and experiences, deters direct competition as it makes imitation difficult.
Hence, it is natural that Karakaya (2002), names incumbents’ secrets and necessary R&D intensiveness as one of the factors for competition entry. Learning curves, previous experiences, and internal capabilities could all assist an incumbent in obtaining an advantageous competitive position, and hence could be regarded as a barrier (Porter, 1998).
Thereby, a competition barrier for the development of a competing product is the level of product complexity.
29
Production investments as a barrier to the Production Processes phase
In order to make a physical product available to the market, the product needs to enter production.
Starting production of a product entails a range of activities, such as, planning of production, plant layout, selection of equipment and machinery, as well as process planning (Asiedu & Gu, 1998).
Furthermore, production also entails costs such as, facilities, equipment, energy, materials and salaries (Asiedu & Gu, 1998).
When attempting to produce a similar product to one already on the market, a similar type of production equipment and materials are often necessary. Thereby, the necessary investment in production is proportional to the type of equipment used in the original product. Investments in equipment and material binds capital, which needs to be financed, and requires further working capital. Because a company’s resources are finite, these investments need to be weighed against other possible investments in order to decide which to pursue (Engwall, et al., 2017).
Consequently, economies of scale, capital requirements, sunk costs and superior production processes are regarded as factors which may deter players from competing (Karakaya, 2002).
Thereby, both a more investment heavy but also more efficient production might deter companies from creating a competing product. Some academics argue that high fixed costs incurred by entering the market do not pose a complete barrier, as despite those, it is often still possible to create a profitable business. Nonetheless, the deterrence of high fixed costs cannot be disregarded (Baumol & Willig, 1981).
Accordingly, this barrier is summarised as the production investments required to compete.
Product perception as a barrier to the Marketing phase
In order to reach the desired customers, many companies, when launching a product, use advertising campaigns (Kotler & Armstrong, 2014, p. 293). In which they promote the product and its features in order to entice a potential customer to purchase the product. Marketing has its essence in the brand image it creates for consumers. A superior competitive position may be gained merely by strongly communicating the product’s value to consumers. So much so, that a consumer perception of a quality product could overrule the importance of actual quality embedded in the product (Hill & Jones, 2008). Kotler’s fundamental theorem of market share determination holds that the market shares of various competitors are proportional to their shares of total marketing effort (1984).
A barrier to the marketing phase could be for example, brand authenticity. If a company attempts to advertise a similar product to one which already exists, that company is at a disadvantage if the incumbent product is perceived as the authentic option. The authentic brand will be perceived to have quality and leadership rather than being a copier. (Aaker, 2012)
Another example of creating a competition barrier through marketing is addressing the customers’
emotions. Academic research has shown that consumer choice is often dependent on analysis of both rational and emotional aspects (Consoli, 2010). Emotions seem to influence information processing, affect persuasive appeals and memory encoding (Bagozzi, et al., 1999). Thereby, affecting consumers’ emotions as one tries to create a superior image could have beneficial consequences.
