Beating Low Cost Competition: How Premium Brands can respond to Cut-Price Rivals

Preface

Acknowledgments

1 The Growing Challenge from Low Cost Competitors

The Challenge is Real and It is Here to Stay

Retailing

Airlines

Banking

Fast-moving consumer goods

Consumer electronics

Business-to-business products and services

In Many Industries the Major Threat is Coming from Asia

Many Customers Prefer Good Enough Products and Services

Low Cost Competition Is Not All Bad News

Understanding and Responding to the Challenge of Low Cost Competition

2 Why the Threat from Low Cost Competition is Intensifying

Value Propositions Have Three Core Elements

Performance value

Price value

Relational value

One core value proposition is usually emphasized

The relative size of the different value segments may evolve over time

Product category life cycles are getting shorter

The Traditional Integrated Business Model is Disintegrating

Three core processes underpin any business

Giving balanced attention to all three core processes can lead to conflict

Companies are leveraging the specialized players

Companies with focused business models are playing a much bigger role in many industries

Many more companies are opening their business models

But there are significant risks in relying more on strategic partners

Total solution coordinators are helping some companies leverage these networks

Growing Support for Low Cost Competitors

Low cost entrants sometimes have powerful supporters

Customers are increasingly willing to buy from low cost players

Challenge Questions

3 Understanding How Low Cost Competitors Play the Game

Ryanair

Performance has been outstanding

Value proposition is crystal clear

Business model is innovative and focused

Extreme focus on cost control

Created a virtuous cycle

So far . . . so good

ING DIRECT USA

Borrowed with pride

Appealing value proposition

Early success

Competition finally responds and ING DIRECT raises the stakes

Learning from Low Cost Competitors

Question every element of the traditional business model

Have very simple and straightforward value propositions

Avoid complexity at any cost

Break through the communication clutter

Be a cost innovator

Remember that the customer is not always right

Have the courage to drop prices significantly below competition

Traditional Players Can Learn from Low Cost Competitors

Challenge Questions

4 Realistically Assessing the Threat

Some Industries Are Less Vulnerable to the Low Cost Threat

Why Companies Fail to Respond to the Low Cost Threat in a Timely Manner

The low cost threat is underestimated

The low cost threat often takes time to gain momentum

Sometimes it is the second-order effects that have the biggest impact

Realistically Assessing the Threat ... and the Opportunity

“Beat my business” exercises can be a useful tool

Identifying actual and potential low cost competitors is key

Understanding what is driving the strategy of the low cost competitors

Core capabilities, distinctive resources and major gaps are often key drivers of a low cost competitor’s strategy

Low cost competitors can overcome critical gaps in creative ways

How might a low cost competitor significantly enhance its position?

Low cost competitors often follow similar strategies to improve their position

It is a challenge to anticipate the moves of unconventional competitors

Most Business Models Have Limited Reach

Developing a Worst Case Scenario Can Provide a “Burning Platform”

Framing the Financial Analysis as a Comparison of Two Futures is Critical

Challenge Questions

5 Confronting Low Cost Competitors in the Price Value Segment of the Market

Competing at All Levels in the Market is Usually Not Necessary

The Challenge Decision Requires Thinking Through Many Issues

Arguments for Entering the Price Value Segment

“Good enough” products can meet a real market need

Opportunity to engage price value customers and develop better solutions to their needs over time

Opportunity to grow with customer as their strategies evolve

May provide an opportunity for “up-selling”

Gives traditional players some “control” over low cost competitors

Arguments For Not Entering the Price Value Segment

Conflicts with the traditional value proposition of the business

Encourages cannibalization of high-end products

Lacks resources and capabilities to successfully compete

Value Chain Members Can Impact Decisions

An Alternative Way to Provide a Price Value Solution to the Market

Making the Decision in a Timely Manner

Should the Price Value Business Be Independent?

Integration has several potential advantages

Advantages of independence often outweigh the advantages of integration

Some Major Tactical Decisions

Make versus buy

Brand choice is a critical decision

Developing new sales and distribution channels is often necessary

Need to evolve channels over time

Nokia Developed a Strong Position in the Entry Mobile Phone Segment

Local Chinese competitors emerged quickly

Nokia responded rapidly to the threat

Nokia’s results to date in the entry-level business have been very good

Dow Corning Decided to Compete Aggressively for Price Seeking Customers

Dow Corning faced a very tough situation in 2000

Dow Corning launched a new business unit

And the strategy seemed to work well

Aer Lingus Played a Price Value Game in a Different Segment

Competing in Ryanair’s home market

A difficult balancing act between cost cutting and differentiation

Some initial successes but is it sustainable?

Challenge Questions

6 Avoiding Head-to-Head Competition with Low Cost Competitors by Playing a Different Game

Enhancing Performance Value

Electrolux was not well positioned for the emerging market environment

Electrolux responded to the challenge on multiple fronts

Electrolux has made some progress but the challenges still loom large

Maintaining Performance Leadership is a Challenge Today

Rising costs and shortening windows represent a significant issue

Using open business models can help

Performance value leadership requires constant innovation

Getting beyond the strategic breakpoint can create real competitive advantage

Stressing Relational Value

Orica was facing total commoditization of its core products

Orica began moving toward providing solutions for its customers

Orica leveraged its global leadership position to stay ahead

Tesco built relational value in a mass-market

Tesco combated the threat of the hard discounters by creating customer value

Tesco also managed its costs very effectively

Tesco is the clear leader in the UK and expanding aggressively into new markets

Challenge Questions

7 The Leadership Challenge

Compaq Failed to Make a Successful Transition

Meeting the Challenge of Low Cost Competition Often Requires a Corporate Transformation

Numbers can support the need for change

Building and Managing a Successful Price Value Business

Product and service design challenge

Marketing, sales and distribution challenge

The cost control challenge

Creating and Managing a Relational Value Business

Designing an organization that will encourage building relational value

Developing and using deep customer and market knowledge

Inculcating a customer focused culture throughout the organization

Building relational value is not a quick fix

Challenge Questions

8 An Even More Challenging Future

Cost Innovation Must be Part of Everybody’s Game

The Threat From Low Cost Competition Will Intensify

Traditional Companies Can Leverage Networks to Try to Stay Ahead

Low Cost Competitors Face Their Own Challenges

Anticipate Possible Future Competitive Moves and Proact

Be Willing to Re-think Traditional Business Wisdom

Put the Customer on Center Stage

References

Index