Branding I: A competitive advantage for SMEs

ABSTRACT The total value delivered to the customer is the sum of “what” is being delivered (the product itself) and “how” it’s being delivered (collaboratively, reliably, on-time, post-purchase service etc.). Branding activities is shorthand for trust. As such, branding is part of “how” the value is delivered to the customer. Branding is a minor cost to the manufacturer but delivers significant value to the buyer. When it comes to branding, Western small and medium size companies (SMEs) should have an inherent competitive advantage over low cost manufacturers. By increasing the customer delivered value through branding, Western companies can partially compensate for their structural cost disadvantage embedded in the “what” component. The article explains in the first part why branding renders Western manufacturers more competitive in the global market place. In the second part (published in the next issue) the article will provide a practical branding process for SMEs. INTRODUCTION “To be, or not to be: that is the question: Whether ’tis nobler in the mind to suffer The slings and arrows of outrageous fortune, Or to take arms against a sea of troubles, And by opposing end them?” Shakespeare, Hamlet 3/1 For many owners and executives in the Western fine chemical industry the Shakespearean monologue rings increasingly true in the globalization context. The Western fine chemicals industry is under siege. A combination of adversary drivers such as cost structure, flat demand and enormous price pressure in their home markets are creating the perfect storm conditions. While the problems are obvious, the question remains: what “arms” should they use against this “sea of troubles”? This article shows that the SMEs unique focus on delivering the tangible chemical product fails to acknowledge the sustainable competitive advantage that Western chemical enterprises have over low cost competition at the INTERFACE with the customer. The total customer delivered value does not reside only in the physical product. The delivered value to the customer is the sum of the product (The What) and all the activities at the interface between supplier and buyer (The How) (1) as suggested in equation 1): Equation 1: CUSTOMER DELIVERED VALUE = WHAT YOU MAKE+ HOW YOU DELIVER The “What”, the product itself, is essentially a CAS number. Unless you have a proprietary molecule, what you make is by definition undifferentiated from a supplier to another. Process patents continue to provide weak protection in low cost countries so having good processes can provide only a fleeting cost advantage. Moreover, it is anticipated that low cost producers will continue to keep their structural cost advantage (2) for the foreseeable future. Under these circumstances, activities taking place at the interface between the supplier and the buyer (“The How”) are in fact the only activities that can provide Western companies with a sustainable competitive advantage. This is why Western companies in the fine chemicals industry should invest in interface activities in order to compensate for their lack of competitiveness on the cost side. A small incremental cost in interface activities could increase considerably the value delivered to the customer while providing an attractive return on investment for the SME.   TO BRAND OR NOT TO BRAND: A FALSE DICHOTOMY Branding is one of many activities that belong to the manufacturer interface with the customer. Essentially a brand simplifies the supplier/customer interactions through trust. As such, building the brand can be an important part of creating “The How” component of the customer delivered value. Most of the low cost suppliers do not even have the notion of what a brand is let alone the capability to build a brand. Since branding done right provides considerable customer value at a reasonable cost, this means that there is great scope for branding in terms of gaining market share from other competitors from all over the world. For example, considerable effort is undertaken by purchasing to identify, evaluate, qualify, negotiate, communicate, and collaborate with a supplier. It is undoubtedly much easier for the buyer to skip these tasks by working with a company that has invested in positive brand associations and lived up to its brand promise time and again. In another example, R&D scientists are making critical decisions every day in terms of choice of raw materials and synthetic routes. They are deciding therefore the future consumption of large corporations for many years to come. A SME that makes the information available, increases awareness for its technical solutions and provides support during the development process builds the reputation of a respectable brand and gains the scientists trust. Unfortunately, there is a misperception that a brand is the prerogative of large companies only. Usually SMEs do not have budgets dedicated to this activity. In reality, due to the low level of branding effort in the fine chemical industry, a small investment in branding activities can quickly establish any SME’s market niche leadership. We make the argument that branding is one of the activities that chemical SMEs cannot afford to skip. In fact, a SME that has nothing to say about how it is going to provide customer beyond delivering “the what” is acknowledging indirectly that the company is competing on price. Without a minimal branding effort, these SMEs are simply selling a physical product, an undifferentiated CAS number. It is no surprise that such suppliers will invariably end up being benchmarked against low cost competition. CONCLUSIONS: The value delivered to the customer is the sum of “what” is being delivered (the product itself) and “how” it’s being delivered. Branding is shorthand for trust. As such, branding is part of “how” the value is delivered to the customer and creates customer delivered value. The lack of branding activities is wrongly perceived as a simple cost cutting measure. The first part or this article makes the argument that a buck saved in the short term is a buck not invested in a profitable branding project. In fact, lack of branding from the marketing mix fails to create customer value and capitalize on a small incremental cost for the supplier. Most of the Western chemical SMEs fail to recognize the inherent competitive advantage they have in branding for the Western markets. This is one of the points where Far East producers will continue to struggle in the near future. Making the deliberate choice to forgo branding activities, Western SMEs implicitly focus all business conversations on the product itself thus playing to the advantage of their Far East competitors. The second part of the article provides a practical “How to” on the branding process. It should help SMEs execute the branding process with limited internal resources at minimal cost. MarketChemica offers specialized marketing services to the global fine and specialty chemicals industry. For more information see ” REFERENCES AND NOTES 1. N. Dawar, Chemistry Today, 29(1), (2011). 2. P. Pollak, A. Badrot et al., Contract Pharma, Jan/Feb, (2012) this article documents that the inherent difference in the cost structure between Western and Far East countries will continue to be significant within the strategic horizon timeline.