The Idea in Brief
Formidable price warriors—such as Germany’s Aldi supermarkets, India’s Aravind Eye Hospital, China’s Huawei telecommunications—have gobbled up established players’ lunches. Yet many incumbents ignore these rivals, assuming—mistakenly—that extreme discounting will drive them out of business. Other established players mount price wars, which only slashes their profits without disrupting low cost contenders’ lean business models.
How to fight low cost rivals? Kumar describes four alternative strategies: 1) Differentiate your offerings, 2) augment your traditional operations with low cost ventures, 3) switch to cross-selling products and services as integrated packages, and 4) become a low cost provider yourself.
Choose the strategy that best fits your company’s situation. For example, when Irish airline Ryanair realized it couldn’t compete with Aer Lingus using modest price discounts, it transformed itself from a high cost, traditional carrier into a low cost provider. Its revenues jumped 28% in just one year, and it boasted the highest punctuality rate of all the European airlines.
The Idea in Practice
Kumar offers four strategies for battling low cost rivals:
Differentiate your offerings#•You can combine numerous differentiating factors (e.g., cool products and continuous innovation).•Consumers want the benefits your new offerings would provide.•You can reduce the costs of the benefits you would offer.#Computer maker HP’s restructuring has shrunk rival Dell’s cost advantage from 20% to 10%. And consumers appreciate the added benefits HP offers, such as instant delivery and the ability to see, feel, and touch computers products in stores.Add a low cost business#Your traditional operation will become more competitive as a result.•Your low cost venture will make more money than it would have as an independent entity.•You can allocate adequate resources to the low cost unit.#Dow Corning’s Xiameter unit—a low cost provider of silicone products—sells only 350 of Dow’s 7,000 offerings, so Xiameter doesn’t cannibalize its parent’s sales. It schedules manufacturing when Dow’s factories are idle, sells only large orders, and offers no technical services. After launching Xiameter, Dow turned a $28 million loss in 2001 into a $500 million profit in 2005.Switch to selling solutions#There are no synergies possible between your existing enterprise and a low cost business.•The integration of your products and services provides unique value to consumers.#Australian mining company Orica sold explosives to stone quarries. When low cost players emerged, Orica began providing a new service: laser profiling rock faces to identify the best places to drill holes for explosives. The service improved customers’ rock yields, reducing downstream processing costs—and making customers dependent on the company. Orica’s average sales are bigger than when it sold only explosives.Become exclusively a low cost provider#There are no synergies possible between your existing enterprise and a low cost business.•A significant segment of your consumer market buys based on price.•You are willing to acquire significant new business capabilities.#Ryanair changed every aspect of its business model to become a low cost player. It replaced its entire diverse fleet with just one type of plane, began operating from secondary airports, and moved from travel agency bookings to direct booking through call centers and the Internet. It also eliminated business class, free meals, seat assignments, and cargo carrying.
It’s easier to fight the enemy you know than one you don’t. With gale-force winds of competition lashing every industry, companies must invest a lot of money, people, and time to fight archrivals. They find it tough, challenging, and yet strangely reassuring to take on familiar opponents, whose ambitions, strategies, weaknesses, and even strengths resemble their own. CEOs can easily compare their game plans and prowess with their doppelgängers’ by tracking stock prices by the minute, if they desire. Thus, Coke duels Pepsi, Sony battles Philips and Matsushita, Avis combats Hertz, Procter & Gamble takes on Unilever, Caterpillar clashes with Komatsu, Amazon spars with eBay, Tweedledum fights Tweedledee.
