Strategies to Fight Low-Cost Rivals by Nirmalya Kumar

HP’s restructuring has shrunk Dell’s cost adv from 20% to 10%. Customers have appreciated added benefits like instant deliver, ability to see
Your traditional operation will become more competitive.
Your low cost venture will make more money that it would have made as an independent unit. You can allocate adequate resources to the low cost unit.

Dow Corning’s Xiameter unit – low cost provider of silicone products sells only 350 of Dow’s 7000 offerings, doesn’t cannibalize the its parents sales. From 28 M loss in 2001 to 500 M profit in 2005 Switch to selling solutions
No synergies possible between existing enterprise and low cost unit. Integration of your products and services offer unique vale to customers. Australian mining company Orica – sold explosives to stone quarries. New service laser profiling rock faces to identify best places to drill holes. Become exclusively low customer cost provider
No synergies possible between existing enterprise and low cost unit. A major portion of customer segment is price sensitive.
You are willing to acquire new business capabilities.
Ryanair
Firms can either attack, co-exist uneasily or become low cost plays themselves. It is easy to fight traditional rivals due to similarities in their game plans and prowess but most companies overlook the threats from disruptive, low cost competitors. Coke fights Pepsi, sony with Phillips, avis with Hertz, P$G with Unilever. Amazon with Ebay etc.
Businesses that sell at very low prices as compared to the incumbents might go to bankruptcy (US Airlines) but the point worth considering is that, they quickly reemerge. They slash fares and cut thrills and eventually grab a chunk of market. E.g. Southwest airlines, JetBlue, Aldi supermarket in Germany and other parts. The financial calculations of low cost players are different from the established ones. They earn smaller gross margins but their business models turn those into higher operating margins.
Higher than avng asset turnover ratio, impressive return on assets, because of returns and high growth rates, market capitalization is higher than industry leaders despite larger equity base. Framework for responding to low cost rivals.
ASK – will this company take away my present or future customers? NO – watch but don’t take on the new rival.
YES – don’t launch price war, instead try and increase product differentiation.
ASK – are sufficient number of customers willing to pay more for the benefits my product offer? YES – Intensify differentiation by offering more benefits and over time restructure your company to reduce the price of benefits you offer. NO – Learn to live with the smaller company. If possible merge or take over rivals.
ASK – if I set up a low cost business, will it generate synergies with my existing business? NO – Switch to selling solutions or transform into a low cost player. YES – Attack your low cost rival by setting up a low cost business.
Low cost players stay ahead in the market because consumer behavior work in their favor, new low cost entrant pose stiffer challenge compared to the traditional ones. e.g. – JetBlue’s entry is a concern for Southwest.
The Futility of Price Wars.
Even when market leaders copy the critical elements of the low cost rivals’ business models, they are unable to match their prices. e.g. – Internet booking for airlines doesn’t deliver the kind of cost reductions to traditional airlines that they do to low cost carriers. Slashing prices lowers the profit for leaders without driving the low cost rivals out of market.
When Differentiation works:
When leaders realize, they cannot win the price war, they opt for differentiation.
Differentiation approaches:
Design cool products. e.g. – Apple
Continually innovate. e.g. – Gillette, 3M
Offer a unique product mix. e.g. – Sharper Image, whole foods. Brand a community. e.g. – Harley Davidson
Sell experiences. e.g. – Starbucks, Nordstrom.
Differentiation works when:
Smart business don’t use this tactics in isolation.
Companies must be able to persuade customers to pay for benefits. Companies must bring cost and benefits in line before implementing it.
Dealing with dual strategies.
Companies should set up low cost operations only when the traditional ones will become competitive as a result and new business will derive some benefits that that it would not have enjoyed as an independent unit. E.g. – First Direct, ING Direct. Low cost business unit should use a unique brand name like HSBC’s First Direct. Subsidiary should be housed separately.
A two-pronged strategy delivers results only when the low cost operation is launched offensively to make money and not as a purely defensive ploy to hurt low cost rivals. Eh – Dow Corning’s creation of Xiameter.
Switching to Conquer
If there is no synergy between traditional and low cost businesses, there are two other options to deal with the low cost rivals. Start selling solutions. E.g. – Orica’s blasting solutions Convert into low cost player. E.g. – Ryanair.
Original Article by NIrmalya Kumar