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Barriers to New Market Entry: Sunk v. Relevant Costs

inside of warehouse with a tractor trailer

The way you handle sunk costs when attempting to break into a new market in the federal contracting arena can be the difference between success and failure. Deciding how best to treat these costs depends on how well you understand the difference between a “sunk cost” and a “relevant (or future)” cost, so let’s start there.

A sunk cost is a cost that has already been incurred and cannot be recovered. On the other hand, a relevant cost, sometimes called a future or prospective cost, is a cost that may be avoided if certain actions are taken. 

Because they have already been incurred and are unrecoverable, sunk costs are typically not considered when making future decisions.They are excluded because their cost will remain the same regardless of the outcome of a decision. The relevant costs, however, are contrasted with the potential revenue of one choice compared to another. In other words, in order to make an informed decision, an organization should only consider the costs and revenue that will change as a result of the decision at hand.

Think of it this way: a manufacturing firm has various sunk costs. These include their monthly lease of the factory and the cost of the equipment they have purchased. If the company pays $10,000 per month to lease its factory and has purchased equipment outright for $50,000, those sums are considered their “sunk costs.” 

When the manufacturing company expands into new markets, these sunk costs are typically not recouped. When bidding against another contractor who already has the infrastructure in place, trying to recover the cost of elements purchased is going to quickly drive your price into non-competitive territory. 

How do you know if the competitor has the infrastructure in place? This is where ethically sourced, accurate Competitive Intelligence (CI) can provide the information you need to create your bid in a way that has a good chance of success.

More often than not, it’s expensive to get into a new market. There are always barriers to entry that are cost-related. Although there can be acceptable ways to go about recouping sunk costs throughout the course of a contract, attempting to do so may create an insurmountable, cost-related barrier to successful entry into a new market. Sometimes, these costs just need to be absorbed as the “cost of doing business” that you will choose not to charge back.

Sometimes, the way into a new area within the federal market space is to invest in the infrastructure you will need to complete the deliverables, view those as sunk costs, and proceed accordingly.

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Gathering Competitive Intelligence Ethically

man researching on a computer

A common misperception is that “competitive intelligence” is synonymous with “corporate espionage.”  

Nothing could be further from the truth.  

Corporate espionage is an illegal activity where companies steal valuable information from their competitors in order to gain a competitive advantage.  It may involve tactics such as wiretapping or hacking into proprietary systems to gain unauthorized access to private information. In contrast, competitive intelligence is a legal and ethical activity that uses publicly available information to gain insight into a company’s capabilities, strengths and weaknesses, performance, and general approach, which can then be used to develop likely competitor strategies in a given competition. Competitive intelligence is a widely-used and valuable business practice that leads to developing customer-focused and competitor-countering strategies that improve a company’s probability of a win.  

With that said, it is important to understand the legal and ethical boundaries of competitive intelligence, so that your company will remain above reproach in all of its competitive intelligence efforts.  Following are a few best practices to keep in mind when gathering competitive intelligence:

Define Ethical for Yourself & Your Company

Ethical boundaries are ultimately determined by the customer. For example, in the federal contracting space, the customer is the US government. Because the US government is funded by the American taxpayer and is therefore accountable to them, federal agencies are obligated to ensure that the way they use their allocated dollars is completely fair and free of any fraud, waste, or abuse. This results in a very high standard for what is ethical. Other industries and other countries, however, may have different ethical standards. That’s why it’s so important for you to determine what your company’s definition of ethical is and direct everyone at all levels of the organization to follow those standards. 

Develop a Culture of Ethics and Integrity

Be careful to avoid any ethical gray areas so that you can avoid being removed from a competition because of a real or perceived breach of ethical boundaries. As you collect competitive data, make notes about where you found it. It could be important in the future in case you need to prove that it did not come from a protected source. Talk frequently and openly inside your company about the safe sources to tap for information-gathering and ways to steer clear of any ethical danger zones.