Beating Low Cost Competition

Adrian Ryans is Professor of Marketing and Strategy at IMD, Lausanne, Switzerland. He has designed and taught on executive programs for organizations in North America, Europe, Australia and Asia, including GE, Bank of Montreal, Medtronic, Deloitte, Borealis, Saurer, Vestas, IBM, Boeing, National Semiconductor, BioWare, ASML, Holcim, Varian, Hoechst, Amgen, Fluke, LSI Logic, Hutchison Port Holdings and Qualcomm. He has also acted as a consultant for a number of leading global corporations.

• Contents PrefaceAcknowledgments1 The Growing Challenge from Low Cost CompetitorsThe Challenge is Real and It is Here to StayRetailingAirlinesBankingFast-moving consumer goodsConsumer electronicsBusiness-to-business products and servicesIn Many Industries the Major Threat is Coming from AsiaMany Customers Prefer Good Enough Products and ServicesLow Cost Competition Is Not All Bad NewsUnderstanding and Responding to the Challenge of Low Cost Competition2 Why the Threat from Low Cost Competition is IntensifyingValue Propositions Have Three Core ElementsPerformance valuePrice valueRelational valueOne core value proposition is usually emphasizedThe relative size of the different value segments may evolve over timeProduct category life cycles are getting shorterThe Traditional Integrated Business Model is DisintegratingThree core processes underpin any businessGiving balanced attention to all three core processes can lead to conflictCompanies are leveraging the specialized playersCompanies with focused business models are playing a much bigger role in many industriesMany more companies are opening their business modelsBut there are significant risks in relying more on strategic partnersTotal solution coordinators are helping some companies leverage these networksGrowing Support for Low Cost CompetitorsLow cost entrants sometimes have powerful supportersCustomers are increasingly willing to buy from low cost playersChallenge Questions3 Understanding How Low Cost Competitors Play the GameRyanairPerformance has been outstandingValue proposition is crystal clearBusiness model is innovative and focusedExtreme focus on cost controlCreated a virtuous cycleSo far . . . so goodING DIRECT USABorrowed with prideAppealing value propositionEarly successCompetition finally responds and ING DIRECT raises the stakesLearning from Low Cost CompetitorsQuestion every element of the traditional business modelHave very simple and straightforward value propositionsAvoid complexity at any costBreak through the communication clutterBe a cost innovatorRemember that the customer is not always rightHave the courage to drop prices significantly below competitionTraditional Players Can Learn from Low Cost CompetitorsChallenge Questions4 Realistically Assessing the ThreatSome Industries Are Less Vulnerable to the Low Cost ThreatWhy Companies Fail to Respond to the Low Cost Threat in a Timely MannerThe low cost threat is underestimatedThe low cost threat often takes time to gain momentumSometimes it is the second-order effects that have the biggest impactRealistically Assessing the Threat ... and the Opportunity“Beat my business” exercises can be a useful toolIdentifying actual and potential low cost competitors is keyUnderstanding what is driving the strategy of the low cost competitorsCore capabilities, distinctive resources and major gaps are often key drivers of a low cost competitor’s strategyLow cost competitors can overcome critical gaps in creative waysHow might a low cost competitor significantly enhance its position?Low cost competitors often follow similar strategies to improve their positionIt is a challenge to anticipate the moves of unconventional competitorsMost Business Models Have Limited ReachDeveloping a Worst Case Scenario Can Provide a “Burning Platform”Framing the Financial Analysis as a Comparison of Two Futures is CriticalChallenge Questions5 Confronting Low Cost Competitors in the Price Value Segment of the MarketCompeting at All Levels in the Market is Usually Not NecessaryThe Challenge Decision Requires Thinking Through Many IssuesArguments for Entering the Price Value Segment“Good enough” products can meet a real market needOpportunity to engage price value customers and develop better solutions to their needs over timeOpportunity to grow with customer as their strategies evolveMay provide an opportunity for “up-selling”Gives traditional players some “control” over low cost competitorsArguments For Not Entering the Price Value SegmentConflicts with the traditional value proposition of the businessEncourages cannibalization of high-end productsLacks resources and capabilities to successfully competeValue Chain Members Can Impact DecisionsAn Alternative Way to Provide a Price Value Solution to the MarketMaking the Decision in a Timely MannerShould the Price Value Business Be Independent?Integration has several potential advantagesAdvantages of independence often outweigh the advantages of integrationSome Major Tactical DecisionsMake versus buyBrand choice is a critical decisionDeveloping new sales and distribution channels is often necessaryNeed to evolve channels over timeNokia Developed a Strong Position in the Entry Mobile Phone SegmentLocal Chinese competitors emerged quicklyNokia responded rapidly to the threatNokia’s results to date in the entry-level business have been very goodDow Corning Decided to Compete Aggressively for Price Seeking CustomersDow Corning faced a very tough situation in 2000Dow Corning launched a new business unitAnd the strategy seemed to work wellAer Lingus Played a Price Value Game in a Different SegmentCompeting in Ryanair’s home marketA difficult balancing act between cost cutting and differentiationSome initial successes but is it sustainable?Challenge Questions6 Avoiding Head-to-Head Competition with Low Cost Competitors by Playing a Different GameEnhancing Performance ValueElectrolux was not well positioned for the emerging market environmentElectrolux responded to the challenge on multiple frontsElectrolux has made some progress but the challenges still loom largeMaintaining Performance Leadership is a Challenge TodayRising costs and shortening windows represent a significant issueUsing open business models can helpPerformance value leadership requires constant innovationGetting beyond the strategic breakpoint can create real competitive advantageStressing Relational ValueOrica was facing total commoditization of its core productsOrica began moving toward providing solutions for its customersOrica leveraged its global leadership position to stay aheadTesco built relational value in a mass-marketTesco combated the threat of the hard discounters by creating customer valueTesco also managed its costs very effectivelyTesco is the clear leader in the UK and expanding aggressively into new marketsChallenge Questions7 The Leadership ChallengeCompaq Failed to Make a Successful TransitionMeeting the Challenge of Low Cost Competition Often Requires a Corporate TransformationNumbers can support the need for changeBuilding and Managing a Successful Price Value BusinessProduct and service design challengeMarketing, sales and distribution challengeThe cost control challengeCreating and Managing a Relational Value BusinessDesigning an organization that will encourage building relational valueDeveloping and using deep customer and market knowledgeInculcating a customer focused culture throughout the organizationBuilding relational value is not a quick fixChallenge Questions8 An Even More Challenging FutureCost Innovation Must be Part of Everybody’s GameThe Threat From Low Cost Competition Will IntensifyTraditional Companies Can Leverage Networks to Try to Stay AheadLow Cost Competitors Face Their Own ChallengesAnticipate Possible Future Competitive Moves and ProactBe Willing to Re-think Traditional Business WisdomPut the Customer on Center StageReferencesIndex

"...what this book does very well is to act as a checklist of how to gain a significant and meaningful understanding." (Admap, June 2009)