Notes - Strategies to Fight Low Cost Rivals PDF

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Strategies to fight low-cost rivals Threat of low-cost, disruptive competitors – by use of deregulation, globalization, and technological innovation (Costco, Wholesale, Dell, Southwest Airlines, Wal-Mart) - Most companies behave as though low-cost competitors are no different from traditional rivals - Eventually forces companies to vacate entire market segments - When market leaders respond – set off price wars hurting themselves more than challengers - Other companies become more defensive and focus on differentiation - Offensive strategy -- launching low cost businesses (dual strategy – succeeds only if companies can generate synergies between existing business and new ventures – if they cannot, firm is better off trying to transform into solution provider or low-cost player Sustainability of low cost businesses Successful price warriors stay ahead of bigger rivals by: - Focusing on one or a few consumer segments - Deliver basic product or provide benefit better than rivals - Back EDLP with superefficient operations to keep costs down Aldi (German) -- retailed that owns Trader Joe’s in US - Size of product range – small stores that carry about 700 products – 95% are store brands compared with 25,000+ products that traditional supermarkets carry - Chain sells more of each product than rivals – enables negotiation with suppliers for lower prices and better quality - Small number of products keeps supply chain agile – set up outlets in downtown areas and suburbs where real estate is relatively inexpensive, start-up costs are low, enables it to blanket markets - Displays products on pallets rather than shelves to cut restocking time, customers bring own bags, refundable deposits for shopping carts to ensure they are returned, several checkout lines to reduce waiting times, fast scanning machines - Every Aldi store in country charges same standard prices – reinforces imagine as consumer champion - Adds 8% for transportation, rent, marketing, and OH, 5% for staff costs – 13% average markup on products compared to 28-30% for other German retailers - 20 percent share in supermarket business Low cost players: - Earn smaller gross margins – business model turns into higher operating margins magnified by higher than average asset turnover ratios, resulting in high ROA - Returns and high growth, market capitalization of upstarts higher than those of industry leaders despite larger equity bases for leaders Europe - Ryanair – 1/7th the size of British Airways in terms of revenues ($2.1 billion vs. $15.5 billion) – operating margin @ 22.7% compared to BA’s 7.35% -- market cap of $7.6 billion higher than BA’s $7.3 billion.

Framework for responding to low-cost rivals - Will company take away from present or future customers? - Are sufficient number of consumers willing to pay more for the benefits offered? - Will setting up low-cost business generate synergies with existing business? Low-cost companies stay ahead of market leaders because consumer behavior works in favour - If business gets customer to buy products on basis of price, it will lose customer only if rival offers lower price - Only new entrants with lower cost structures can compete with price warriors Futility of price wars - Wait-and-watch strategy – works for companies that market products for people at very top of the pyramid - Alter customer behavior permanently - Individual elements of model...