Creating Profit Through Alliances - business models for collaboration E-book | Page 10

Differentiation leads to profit
Every branch of industry has its own characteristics
and, depending on supply and demand, their prices
are higher or lower. If you are looking to buy a new
car, you will have plenty of choice and the margins of
the dealer and supplier are small. If you are looking
for someone to repair your central-heating boiler in
the middle of winter, supply is limited and prices are
correspondingly high.
There are a number of characteristics that lead to
more power for the demanding or for the supplying
party. Those characteristics are shown in Table 1. A
balance between supply and demand leads to a
market price. Balance between supply and demand
(because often there will be only one dealer per car
brand in a city, and only a handful of installers per
region) allows everyone to make a reasonable living.
If there are too many suppliers, turnover drops and
someone will have to close his business. If the
number of suppliers is too low, it won't be long
before someone tries his luck and opens a new
business. If you are unlucky, you also have a cost
disadvantage, such as 'standard shops' in excessively
expensive locations, or consultancy agencies with
overpaid staff. In other words, with a standard
product your profits will always remain limited.
More power to the supplier of products or services
 The number of suppliers is limited, so there is
little competition
 There are many differences between suppliers, it
is difficult to make a comparison
 To suppliers it is an unimportant product, they do
not depend on it and do not have to sell at loss
 There are no substitutes
 It is difficult for the buyer to abandon or
postpone his need

It is easy to perform worse than the average in your
branch of industry, and a number of well-managed
businesses will certainly earn more than that
average. However, it will be difficult to earn
significantly more than the average if you cannot set
yourself apart from the competitors. As soon as
elements of your clientele, suppliers, method, etc.
become known, at least one of your competitors will
follow your example. This competition will again
reduce your advantage.
Southwest was the first airline company in the United
States to introduce the low-cost principle: no coffee
or meals during the flight, having to check in again
for the next flight and no frequent flyer bonus
schemes. In addition, everything was organised in
such a way that the aircraft turnaround time could be
kept to a minimum. This enabled them to keep ticket
prices extremely low, and Southwest was very
successful in doing so. In Europe, Easyjet and Ryanair
are the biggest followers.
These days, every established airline company offers
short flights at low prices and they often have a
subsidiary operating according to the same principle:
Singapore Airlines has Tiger Airways, Iberia has
Clickair. This means that competition has become
fierce in this market segment too.
More power to the buyer of products or services
 The number of buyers is limited, every buyer
represents a lot of turnover
 Where he buys his products is irrelevant to the
buyer, product variations are small
 Suppliers are highly dependent on this product
and cannot afford to miss a sales opportunity
 There are plenty of alternatives
 It is difficult for the supplier to keep the products
in stock any longer and sell them later on.

Table 1. Factors that determine where the power lies between supplier and buyer

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