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IGNORE LOW COST COMPETITORS AT YOUR RISK AND PERIL

Value competition a priority issue

By Professor Adrian Ryans (September, 2006)

Professor Adrian Ryans

Excerpt from webcast: Pay less, get more (1:50)

Value competition is a growing reality in most industries. Management teams ignore it, but it should be a priority issue on top management teams’ agendas.

Value competitors offer “good enough” products and services at very attractive prices, and their value propositions are appealing to several market segments, often rapidly growing ones. Companies such as Ryanair, easyJet and other low-cost carriers in Europe have captured over 25% of the intra-Europe airline trip market. In the UK domestic market their share is approaching 50%.

In financial services, value competitors also prosper. In 2006, ING Direct delivered over €700 m of pre-tax profit to its parent company, a 65% increase in two years.

In food retailing, hard discounters are capturing a growing share of the retail grocery market in many countries and have almost a 20% market share across Western Europe. Local value competitors are capturing significant market shares in countries like China and India. Huawei, a Chinese telecommunications and networking equipment company, has been doubling its international sales in recent years, and is now a supplier to some major European carriers.

"Quality" is in the mind of the customer
Today, for certain customer segments, the “quality” of some of these value products and services not only matches, but may actually exceed that of the traditional players. Some customers prefer to order products or services, or conduct transactions over the Internet, at a time convenient to them, rather than waste time dealing with a poorly trained sales or service representative in person or at a call center.

Growing challenge
Some companies, particularly in Asia, have built strong value offerings to meet the needs of customers in their local markets. If Western companies don’t challenge them in the core value segments in their domestic markets, they may be unstoppable when they do emerge in global markets.

Cost saving
When Ryanair became the first major airline to eliminate “free” checked luggage to drive down its costs, some observers were less than happy. But Ryanair combined the move with lower fares, and web check-in. In a few months, the company had extended its competitive advantage.

Value players provide learning opportunities
Recently Lufthansa began “over-nighting” seven of its planes and basing the associated flight crews in Hamburg, rather than having them spend the night at different airports around Europe. This is something Ryanair does routinely to reduce costs. Lufthansa got some unexpected benefits from this cost-saving move. Having the same attendants on some of the flights day after day resulted in them getting to know the regular customers on these flights, thus increasing satisfaction for both customers and flight attendants.

Threat and Opportunity
For most companies value competition represents not only a threat, but also an important stimulus and opportunity for learning. Companies may have to re-think the segmentation of their markets and develop a deeper understanding of needs by market segment. In some cases, the traditional players might have to respond aggressively to the value competitors, or their whole market position might be jeopardized. Unfortunately too many companies are complacent and think that they are immune to the threat of value competition.

Be aggressive!
If a company decides that it should move against emerging value competitors, it is almost always better to move quickly and more aggressively than it thinks it needs to. Even then it will probably not be moving fast enough!

Professor Ryans is director of the Low Cost Competition program. He teaches on the Mastering Technology Enterprise (MTE) and the Breakthrough Program for Senior Executives (BPSE) programs.


For information on IMD's China Research Center


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