FP&A people should develop a good understanding of competitiveness. It is not just about the general concept but the specifics of the company. Financial Planning and Analysis (FP&A) is not the only function concerned, so we should be at least on par with the others and, hopefully, become a vector to improve the common understanding.

What Is Competitiveness?

A company's competitiveness depends on a large number of factors specific to the industry and the organisation's situation, and these factors combine to determine its level of competitiveness. This competitiveness may influence profitability and the long-term health of the business. While finance and FP&A tend to focus on short-term profitability improvements through cost-cutting, they should broaden their approach and work on the profitability source, i.e., competitiveness.

Competitiveness is the result of the interaction of external and internal factors, and it conditions performance in the short, medium and long term. Only a detailed understanding of this combination allows FP&A teams to act on competitiveness or assess it. The following list of factors gives an idea of the level of complexity to be covered.

The Factors to Consider

1. Types of markets and types of competition

It involves creating and maintaining a precise understanding of the company’s markets, their evolution and the competition within them. The geography of the company’s markets, their maturity and the dynamics of the various drivers, regulations and environment are the elements to be understood in a medium- and long-term perspective to allow a business to adapt defensively or take proactive actions to take advantage of certain opportunities.

• Market type: Is the company active in local or multi-local markets, international or global markets, and are those markets evolving?
• How mature are these markets? What about their evolution? Is it homogeneous across the different geographies covered?
• How intense is the competition?
• How do the regulations and the economic and political environment evolve?

2. Company’s scope

Competitiveness also depends on the company’s evolution along with its different dimensions to adapt to its markets and the competition that develops within these markets.

• How does its geographic scope cover the geographic markets’ scope?
• How does its product/service scope cover markets’ needs?
• How does the company fit in the value-added chain?

3. Potential buyers’ perception

The company and its product image are an important lever for its competitiveness. It is about meeting buyers' expectations and creating positive differentiation from competitors. A significant milestone is reached when these buyers become loyal customers.

• What is the company’s brand image, visibility and reputation compared to the competition?
• How do customers perceive the company's products and services in terms of features, range, quality/durability and prices?

4. Capacity to produce goods/services with competitive costs and quality

As far as the production of goods and services is concerned, four elements play an essential role. Economies of scale, thanks to volume, productivity, access to resources and quality level should be carefully studied and used as vectors to improve competitiveness. Too much focus is often on the ease and cost of accessing resources, but factors like volume, productivity and quality have a greater impact on the final cost.

We have to consider the following questions:

• How is the company positioned in terms of volumes and associated economies of scale?
• How does its productivity rank versus the competition?
  • Intensity of investments, automation, etc.,
  • Organisational efficiency, including processes, agility, experience curve, etc.,
  • Utilisation rates of fixed resources.
• How does it compare in terms of ease and cost of access to the necessary resources:
  • Intellectual resources such as Innovations, licences, research and development, etc.),
  • Physical resources such as raw materials, semi-finished products, components,
  • Human resources such as level of training, average hourly costs,
  • Financial resources such as equity, bank facilities and others.
• How does it stand in terms of quality?

5. The ability to market and deliver

The same elements will impact marketing and delivery but respond to different dynamics.

• What is the level of client engagement and cooperation?
• How efficient is the organisation in terms of processes, agility, reliability, etc.)?
• Cost of access to necessary resources:
  • Logistics,
  • Commercial network, including pre-sales, sales and after-sales.
• How effective is customer experience?

6. Company culture

The company’s culture will either facilitate or hinder the pursuit of competitiveness.

Benchmarking

It has real value if only it is run on a comparative basis. While full benchmarking may not be possible, a proper level of competitive and Business Intelligence may permit some assessment. It means that FP&A should not exclusively focus on internal facts and data. FP&A should collect and analyse external data in collaboration with other functions.

Each factor requires a detailed analysis to obtain a sufficient understanding of the current state of the company’s competitiveness. A prospective effort on these factors will also be necessary to improve organisational competitiveness. However, something that worked well in the past is no guarantee of future success.

Improving Competitiveness

Acting only on one of the factors will not be enough to achieve a significant improvement. These factors interact, and the entire set of interactions must be considered for an improvement plan to succeed. In fact, a permanent and structured focus on competitiveness is much more effective and easier to manage than a "reactive" approach triggered by insufficient competitiveness. For example:

• Focusing on profitability and its improvement through cost management is insufficient because it corresponds to measuring and acting on the consequences rather than the causes. This perspective can even lead to negative effects in the medium and long term. By acting on the causes, one can sustainably improve competitiveness and, consequently, profitability.
• Focusing on the resources to be implemented is insufficient because they are only resources. Accumulating or developing them does not necessarily ensure their sustainability. Moreover, the escalation of commitments can quickly become a cognitive bias known as the "sunk cost fallacy".
• Focusing on demand or supply without considering competition and market dynamics is insufficient and generally detrimental.
• Focusing on Research and Development (R&D) projects without understanding how they will improve competitiveness can result in a loss of money and opportunities.

Finance and FP&A must keep in mind the hard reality of business life. The least competitive units will be eliminated from the competition in favour of the more competitive ones when growth slows, or market conditions become tougher. It can be the result of:

1. A market transitioning from an investment phase to a renewal phase, shifting from growth to decline and an oversupply relative to demand.
2. A market becoming international or global, which may disrupt competitive scope and cost effects linked to volumes.
3. The emergence of substitute products due to or through significant product innovations.
4. New entrants benefit from technological or cost-competitive advantages.
5. Part of the competition going through mergers or acquisitions, which may disrupt existing volume effects and, thus, unit costs.
6. Changing consumer and customer expectations, and so on.

Conclusion

Ensuring an entity's competitiveness requires a well-constructed and intentional 360° approach, which must be maintained over time, taking into account environmental changes.

Competitiveness remains a relative phenomenon, as it is assessed by comparison with other players and not in absolute terms.

FP&A teams should not only understand the complex network of interactions that drive competitiveness, but they should also become a key player and user in this domain.