Question

In The Five Competitive Forces That Shape Industry Competition, Porter identifies customer switching costs as one of the barriers to entry into an industry. The specific example that resonated with my work situation was about ERP software:

“Enterprise resource planning (ERP) software is an example of a product with very high switching costs. Once a company has installed SAP’s ERP system, for example, the costs of moving to a new vendor are astronomical because of embedded data, the fact that internal processes have been adapted to SAP, major retraining needs, and the mission-critical nature of the applications."

As a small business, we do not currently have an ERP system (we have separate programs for separate functions) and the system used by our headquarters is still not all-inclusive. Nevertheless, it has been my experience that every significant software or tool purchased in a small business makes a momentous impact on how business is run for years or even decades. Therefore, even if a vendor would be a perfect fit for our needs, it is difficult to justify the cost and time required to switch vendors and upgrade our process. We see a similar issue with our own products when discussing filtration solutions with smaller shops. They would often like to improve their production site with correct equipment, but can’t get the financial approval or have the manpower available to do so.

Thus, it seems that companies whose primary customers are small businesses most likely have a first mover advantage and benefit from long customer retention because of barriers to entry and a low buyer bargaining power. Arguably, this primarily applies to products or services of higher values.

Have you experienced a similar situation and, if so, do you have any suggestions on innovative ways companies can overcome switching cost barriers to entry? Do you think improving any one of the other five forces might help?

need good suggestion.

Answer 1

The ERP system is used where the size of employees is more. For e.g.. General Motors they uses this type of software in their organization because of line of production and the number of employees.However for small business this will add to their cost.

We are in the production of cloth material nd faces similar issues of barrier.However there are certain ways by which we can reduce these costs which are adopted by our organization

• Customer Oriented : Never disappoint your customer and because of them market roller works. The making and altering of goods on the demand of customer will help you in their retension.Once the customer is satisfied they will never switch to other substitute.
• Employee Retention:Sometimes the customer is more linked to the employees they are communicating with therefore to retain the employee will gain you customer loyalty towards your business.
• The price of the product can be mold in such a way that all income groups are able to buy the product. For e.g.. the prices of our cloth depends upon the quality of our cloth. Higher the quality more is the prices. All income group are treated equally are ready to purchase the cloth as per there purchasing power.
• Reducing the competition and increasing the partnership and association with the market.
• Room for Innovation and expansion : Sometimes the products is of daily routine so to attract it may require innovation and after setting the base in the home country one should think of expanding the business to other countries as well
• The startup should not just think of making profit initially instead they should be of notion that if also they incurred losses they have to work actively for long term to compensate those losses to profits
• Sales Platform: Marketing the product on high level. The small business does not have much of liquid capital therefore marketing using social media or you tube or through any source would help the product to reach out at customer and they will be able to sell the product beyond the demographic area.
• Advice to small business: Try to use rented property or a lease property as the purchasing will add to the cost and barrier in exit will demotivate the small business
• Merger with big business to gain competitive advantage or Partnership so that there brand is added with them.

The force which can be improved is Power of customer

• Customer is the person who can go in any direction if they are not satisfied.
• To satisfy them : the quality and service should be good and the prices should be optimum hence this will retain them.
• If in the already set market the prices are not reduced by any vendor in this case the customer has to purchase in that price only, however the price should be decided by the authorities.
• The less the negotiation and exact price the goods will sold at.
• Hence the power of customer can be improved as they should not take undue advantages of small business by lowering the price of the product below the belt.