Strategies to Fight Low-Cost Rivals by Nirmalya Kumar

HPs restructuring has shrunk Dells make up adv from 20% to 10%. Customers have appreciated added benefits like instant deliver, ability to seeYour traditional operation give befit more competitive.Your let out personify make will make more money that it would have made as an freelance unit. You can allocate adequate resources to the humbled follow unit. Dow Cornings Xiameter unit low speak to provider of silicone products sells only 350 of Dows 7000 passingings, doesnt cannibalize the its parents sales. From 28 M loss in 2001 to viosterol M profit in 2005 Switch to selling solutionsNo synergies affirmable surrounded by existing enterprise and low hail 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 outstrip places to drill holes. Become exclusively low customer make up providerNo synergies possible between existing e nterprise and low follow unit. A major portion of customer segment is price sensitive. You are will to find out new agate line 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 just 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 precise low prices as compared to the incumbents might go to bankruptcy (US Airlines) but the height worth considering is that, they quickly ree coalesce. 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 hi gh operating margins.Higher than avng as post turnover ratio, magnificent 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 encounter away my present or future customers? NO watch but dont take on the new rival. YES dont launch price war, preferably 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 minify 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 busines s.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. JetBlues entry is a concern for Southwest.The Futility of Price Wars. Even when market leaders copy the vital elements of the low cost rivals business models, they are unable to match their prices. e.g. net 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. 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 portion out experiences. e.g. Starbucks, Nordstrom.Differentiation works when Smart business dont use this play in isolation. Companies moldiness 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 HSBCs First Direct. appurtenant should be housed separately.A two-pronged strategy delivers results only when the low cost operation is launched obnoxiously to make money and not as a purely justificatory ploy to hurt low cost rivals. Eh Dow Cornings creation of Xiameter.Switching to worst 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. Oricas blastin g solutions Convert into low cost player. E.g. Ryanair.Original Article by NIrmalya Kumar