Kebabs and the competitive environment

Alaric Fairbanks this week makes our mouths water with the mention of some of his favorite local kebab stalls.  However, on a more serious note, Alaric is analyzing how street vendors of this relatively undifferentiated offering encounter many of the same problems faced by much bigger organizations in different markets around the world.

As almost anyone with a penchant for mutton and beer will tell you, one of the best things about living in Beijing, providing you don’t live right next to a stall (they can be quite smelly, and the lack of toilet facilities coupled with beer consumption of patrons can be problematic for neighbors), are chuanr, or kebabs.  Mutton, chicken hearts and tendons, washed down with a bottle or two of Yanjing beer are, for me at least, pretty much indispensable to life in China’s capital city.  But can this tell us anything about the business environment?  Interestingly, for me at least, this came up in a recent conversation I had whilst patronizing my favored stall.

This must be one of the toughest markets to be in, and in many ways can be seen as representative of the competitive environment in undifferentiated markets, especially in China.  Let us take, for example, a quick look at Porter’s Five Forces applied to this business model.

  • The threat of new entrants: Obviously barriers to entry are low (an improvised barbeque is not a significant cost) and switching chuanr vendors is fairly easy. Similarly, adding to the product range, for example with ram’s penis, can be very easily copied by the competition.
  • Supplier power: The raw material – mutton and other assorted parts – forms the substantial part of costs relative to total purchases, and there are almost no substitute inputs.  To make matters worse, these raw material costs have a huge impact on total cost.
  • Threat of substitutes: Again a problem, as it’s not difficult for the customer to switch to ma la tang (numbing and spicy soup) or rou jiamo (a very distant cousin of the hamburger).
  • Customer power: Price sensitivity of customers is pretty much a given in many markets in China, and chuanr are no exception.  Buyer information (in this case buyers know the going rate for the product as it is the same everywhere) leaves little room for incremental increases.  Backward integration by customers is, on the face of it, less of an issue as most of us will be pretty unwilling to invest in our own barbecuing equipment. Where there is a problem here, is when selling through a small restaurant, as there is little to prevent the ‘partner’ setting up their own stall.
  • Rivalry or competitive intensity: Here we have a very fragmented market, almost entirely composed of sole traders.  Fixed costs are low, having a limited impact here on rivalry in some respects as they do not have a great role in the unit cost of chuanr; however, this does mean that entry barriers are low.  The nature of the raw material, mutton, does have an impact, as these perishable products must be sold immediately.  Fortunately, exit costs are low, as equipment is not highly specialized and no one is ‘forced’ to stay in the market.  This is also not a market that so far has lent itself to product differentiation or branding, thus almost commoditizing the market.

So what does this tell us?  Many of the markets we look at in China, and elsewhere, exhibit some of these characteristics, particularly in the areas of new entrants, substitutes, and low levels of differentiation.  There are, though, examples of companies growing or moving out of unattractive markets, and differentiating themselves from the competition in a seemingly commoditized market.  Equally, there are some examples of differentiated product and service, and expansion in the chuanr business: Xiao Li, arguably the best producer on Yong An Li East Street, has an embryonic brand, recently added a few plastic stools and a table to complement his offering, and has doubled his workforce with the addition of his charming sister.

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