Strategic Management Accounting, Volume I by Vassili Joannidès de Lautour

Author:Vassili Joannidès de Lautour
Language: eng
Format: epub
ISBN: 9783319929491
Publisher: Springer International Publishing

1.1.2 Substitute Products

As with new competitors, management accountants must know the market and its current actors so as to identify the possibility that a product could be launched as a substitute to their employer’s. Substitute products can emerge on the market under certain strategic circumstances, very similar to those enabling the entry of new competitors. Whilst new competitors would enter into a contestable market , a substitute product tends to be the fact of existing competitors in a market characterised by high entry costs. Accordingly, a substitute could only be launched and produced by a competitor having already incurred part or all of these fixed costs (McGahan & Porter, 2002; Porter, 1986, 2008). Traditionally, such can be the fact of a company already acting as a competitor on different market segments and taking the opportunity of this new product to diversify its portfolio.

The development of a substitute product can occur for a mature market , when the incumbent utilises its lead product as a cash cow and prepares its aftermath (decline or next generation). When the product is mature, the incumbent incurs fixed costs for its next product without necessarily being in a capacity of launching soon. Through business intelligence, existing competitors can determine when the incumbent is incapable of reacting if its lead product is challenged by another one. Three options are open.

The first option consists of launching a very similar product sold cheaper, i.e. cost domination and the subsequent absorption on a customer basis. If the product ’s price elasticity is high, the cost domination strategy may undermine the incumbent ’s sales. Such can be the case with electronic goods or the ready-to-wear fashion industry through general brands mimicking one another and advertising inexpensive similar products. If the product ’s price elasticity is low, the transfer of customers to the new product shall not too strongly affect the incumbent . As with new entrants, management accountants must be very attentive to the product ’s price elasticity on one hand and to the new product that is likely to be launched and threatens the current one. Often, distributors and merchandising companies do develop their own branded products competing with their suppliers as with cola-based sodas (Nestle, 2017).

The second option is that of producing a product offering some different features, i.e. differentiation strategy . Such can occur when the lead product on the market is generic and has a limited amount of variations, such as colour, shape or size, which can often be ascribed to the fact that the incumbent mass produces it. In this situation, customer tastes are such that they expect the possibility of customising their products. Thence, existing competitors would organise their production around a more or less advanced lean model, in order to be able to respond as tightly as possible to these specific needs (Anvari, Sorooshian, & Moghimi, 2011; Organ, 1997). This option can be either the case of an existing competitor already familiar with lean production and management or capable of venturing with actors themselves lean-savvy.

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