Achieving Value For Money Through Competition

Best value is obtained when you get satisfaction from a product in terms of quantity, quality, and price. That situation is achievable through the articulate pursuit of Value for money which is a requirement to maximize the use of scarce resources. Colloquially, we interpret this to mean “Doing More with Less”. It is the bedrock of business profitability and survival. Value for money in a product, service, or business is generally accepted as covering three basic elements: economy, efficiency, and effectiveness. These are defined as follows:

  • Economy: The practice by management of the virtues of thrift and good housekeeping. An economical operation acquires resources of inappropriate quality and quantity at the lowest cost.  A lack of economy could occur where there is overstaffing, or the acquisition and use of overpriced facilities.
  • Efficiency: This is making sure that the maximum useful output is obtained from the resources devoted to each activity, or, alternatively, that only the minimum level of resources is devoted to achieving a given level of output. An operation could be said to have increased inefficiency if either lower costs were used to produce a given amount of output, or a given level of cost resulted in increased output. Inefficiency would be revealed by identifying the performance of work with no useful purpose, or the accumulation of surplus materials that are not needed to support operations.
  • Effectiveness: is ensuring that the output from any given activity or service is achieving the desired results. To evaluate effectiveness, there is a need to establish that the desired goals are being achieved. A goal as an operating objective should be defined as a concrete expression of a policy objective.

The above three elements of value for money are interrelated and resonate for better competitive results. Economy and efficiency are similar as both relate to saving resources. The economy ensures that input costs are minimized. Efficiency ensures that maximum output is achieved at the minimum level of input cost. Effectiveness is a far more positive element and it means that a service provided properly meets a real need. To be profitable and meet competition, a business must therefore consciously pursue value for money.

Competition on the other hand is the rivalry in the pursuit by companies in the same business as each seller tries to increase sales, profit, and market share by offering the best practicable combination of price, quality, and service. In other words, the battle for market share is fought and won by being able to deliver value for money to your customers. Put simply, competition is the situation in which people or businesses are trying to be more successful than each other, for example, by making more sales in a market. Competition is the foundation of a capitalistic society which was eloquently espoused by the foremost economist in his economic treatise in 1776. Adam Smith regarded every person as the best judge of his self-interest and ought to be left to pursue these interests to his own advantage. However, in man’s course of furthering his own self-interest, he would also end up furthering the common good. In pursuance of this, each individual is led by an “’invisible hand” that guides market mechanism. “It is not to the benevolence of the baker but to his self-interest that we owe our bread,” said Smith. Since every individual, if left free, will seek to maximize his own wealth, therefore all individuals, if left free, will maximize aggregate wealth. Smith’s theory of the ‘invisible hand’ as propelling personal economic interests and consequently national growth,  espoused that buyers and sellers in the market are motivated purely by self-interest but they serve the general interest without having intended it. The competition that is created by the complex operations of market forces brings great benefit to society and raises standards of living.

Businesses of all kinds and sizes should be mindful of competing successfully by the pursuit of value for money and by most importantly thinking entrepreneurially at all times. An entrepreneur shifts resources out of an area of lower productivity into an area of higher productivity and greater yield.  An entrepreneur, therefore, uses resources in new ways to pursue value for money, to maximize efficiency (productivity) and effectiveness (sustain and grow the business). All businesses owe their survival to their ability to react and adapt to a continuously changing environment. This is the only way to position the business to pursue value for money in order to compete.

The benefits of competition to the business are:

  • Innovation: Competition leads to innovation. If you are the only player in your field, it can be difficult to improve. Again, if you are working in a crowded market, you will not succeed by doing what everyone else does. The business must be able to differentiate itself by lower cost and quality. Healthy competition, therefore, encourages change. In a competitive environment, service providers are always seeking ways to drive costs down making it necessary for the players whether public or private to learn from each other. Competition drives organizations to embrace innovation and strive for excellence.
  • Customer service: As one of several companies offering a similar product, you are forced to compete for customers. Improving your customer service will garner loyal followers. Competition-driven service delivery gives a very positive edge. The value for money benefits that arise from competition accrued from reduced costs, enhanced innovation, responsiveness to customer needs, etc. If a profit-driven business pleases its customers, it records increased sales.  If someone else pleases the customers more, the firm that pleases the customer less would lose sales.  So, businesses in a competitive environment learn to pay attention to their customers. Management experts stress the importance of listening to one’s customers.
  • Complacency: Competition shakes off complacency. If your company is consistently trying to innovate and better itself, your employees will be encouraged to push themselves. Where there is competition, better results are obtained with more cost-consciousness and superior service delivery.
  • Understanding your core market: Competition forces you to focus on your core audience. If you are targeting a specific geographic location or demographic, market challenges in that setting will encourage you to pay attention to your target group. In doing so, you will be able to better provide for your customers.
  • Education: Seeing what your competitors do well can teach you about your business. Their practices will provide you with valuable insight into the state of the market, and help show you what works – and what does not. Those who deliver poor service at high prices are gradually eliminated while those who deliver quality services at reasonable prices grow. Competition forces management and employees to rethink the way business is done and search for an advantage that could give an edge.

A competitive business should seek to procure its resources using a contracting system. A good contracting system should meet the following four criteria – bidding is truly competitive; the competition is based on hard information about cost and quality performance; the contractors are carefully monitored throughout the contracting life of the service, and a committee or management team of high integrity is set up to perform the above tasks.  Contracting can save significant sums and contribute to reducing the cost of inputs and the pursuit of value for money.  It works best when a company can define precisely what they want to be done; generate competition for the job; evaluate a contractor’s performance, and replace or penalize those who fail on the deliverables or are not able to achieve expected performance levels.

A more cost-effective way is to mimic competition by performance measurement and benchmarking by constantly comparing the cost, efficiency, and effectiveness of services and processes offered by the best company in your class. Learning from the best will enhance process improvement and sharpen the company’s ability to deliver value for money to its customers.