Strategies to Fight Low-Cost Rivals by Nirmalya Kumar

HPs restructuring has shrunk Dells hail adv from 20% to 10%. Customers micturate appreciated added benefits like eye blink deliver, ability to seeYour traditional operation ordain become more(prenominal) belligerent.Your downhearted address venture will make more money that it would have made as an independent unit. You can allocate nice resources to the scummy monetary value unit. Dow Cornings Xiameter unit blue cost provider of silicone products sells only 350 of Dows 7000 offerings, doesnt cannibalize the its parents sales. From 28 M loss in 2001 to 500 M profit in 2005 Switch to selling solutionsNo synergies possible between existing enterprise and low cost unit. Integration of your products and serve offer unequalled vale to customers. Australian mining company Orica sold explosives to stone quarries. New dish out laser profiling rock faces to identify best places to drill holes. Become exclusively low customer cost providerNo synergies possible between existing enterprise and low cost unit. A major part of customer segment is price sensitive. You are willing to acquire new business capabilities.RyanairFirms 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 nevertheless 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. southwesterly airlines, JetBlue, Aldi supermarket in Germany and other parts. The financial calculations of low cost players are different from the established ones. They earn littler gross margins but their business models turn those into highe r operating margins.Higher than avng asset turnover ratio, impressive pop off on assets, because of returns and high growth rates, market capitalization is higher than industry leaders despite large equity base. Frame last for responding to low cost rivals.ASK will this company take away my present or future customers? NO watch but beart take on the new rival. YES dont launch price war, instead try and increase product differentiation.ASK are sufficient physique 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 commute into a low cost player. YES Attack your low cost rival by setting up a low cost business.Low cos t 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. JetBlues instauration 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 doesnt 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. orchard apple tree Continually innovate. e.g. Gillette, 3M Offer a unique product mix. e.g. Sharper Image, whole foods. Brand a community. e.g. Harley Davidson change experiences. e.g. Starbucks, Nordstrom.Differentiati on works when Smart business dont 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 bivalent 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 HSBCs 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 justificative ploy to hurt low cost rivals. Eh Dow Cornings 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. O ricas blasting solutions Convert into low cost player. E.g. Ryanair.Original Article by NIrmalya Kumar