RETRENCH OR ATTACK?
Dealing with low-cost competition
By Professor Adrian Ryans - May, 2007
You’re used to market dominance. Recently, however, you’re starting to feel the pressure. Low-cost competition is starting to strip away some of your more price-sensitive customers, and the future has certainly looked better. So how do you react? A frontal attack? Concentrate on the “high-end” segments? There is no easy answer. But if you are going to take on the challenge, one thing is sure - you must act quickly and decisively.
In 2006, we conducted a survey about low-cost competition amongst our partners and business associates. The results were as surprising as they were startling: eighty percent of companies said they were facing a very strong low-cost competition challenge. Ninety percent felt it was going to increase over the next five years, and only ten percent felt they were dealing with the challenge effectively.
Let there be no mistake. These low-cost competitors are likely to affect all business areas. Current hotspots are chemicals, industrial equipment and components, IT services, airlines, automobiles, domestic appliances, telecommunications equipment and, of course, consumer electronics. Yet everything points to a far broader penetration.
For many industries, the main challengers are Asian companies. Unlike in the past, when ‘Made in China’ often meant a cheap copy, some of these products are of very high quality. And the Indian challenge is just starting to be felt. The region’s huge domestic markets mean the competitors often hone their skills in there. These local markets are often intensely competitive, so that the survivors are frequently world-class. By the time they appear on the world market, they can have economies of scale and cost structures that are the envy of European and North American players.
So what do you do? First thing to make clear is that, if you take on the challengers, this is a ‘must-win’ situation, one that will have a huge impact on the future of your company. And over time, some of these companies that currently offer only low-end products may see opportunities that are more profitable. They will move away from what is often a free-for-all at the bottom of the market to go after more attractive and profitable customers in the more demanding segments at the higher end. So, ignoring the challenge today may mean you are only putting it off until tomorrow, when your low-cost competitors are in a stronger more entrenched position with established relationships with some of your best customers.
There are examples of this happening already, and many of you will have felt the impact. Haier, for example, the Chinese manufacturer of major appliances, has reached the stage where it is moving into Europe and North America, with local manufacturing of some products. Huawei, the Chinese telecommunications equipment challenger, is now moving quite successfully into Europe, building relationships with British Telecom, KPN and others.
Yet it is not all doom and gloom, there are also opportunities. ING Direct Bank has built a very profitable business selling its low-cost products into nine, soon ten, major countries around the world. This has helped build the ING brand, and provided it with opportunities to sell other financial services and insurance products to these new ING customers. Saurer, the world’s leading supplier of textile equipment, is successfully penetrating the mid-performance tier of its markets in Asia. Some producers of consumer products, such as fashion accessories, are seeing grow rates of 50% per year or more in their target markets in countries like India and China as the middle class expands rapidly.
But think through your strategy quickly. Some companies try to go after the high end and low end within one business unit to take advantage of synergies in R&D, operations, marketing, sales and branding. But often the pursuit of “synergies” really means sharing high-cost infrastructure and the adoption of expensive, traditional work practices that lead to failure. And integration makes it more difficult to focus effectively on low-cost client needs. Usually, a company is better off setting up a separate business unit with its own organization, culture, and brand to go aggressively after the more price oriented customers. In some cases there are real synergies in sharing operations and other resources, and, if so, it may be possible to structure the businesses to still capture these synergies.
However, there are no golden rules, and the answers are specific to individual companies and their market situations. Yet there is one thing that must be stressed. If you decide to take on the low-cost challenge, do it early. And even though you may think you are moving very fast – you are probably not moving fast enough!
Professor Ryans is the Director of IMD’s new Low Cost Competition program (LCC). He teaches on the Orchestrating for Winning Performance program (OWP), Business Marketing (BM), the Breakthrough Program for Senior Executives (BPSE) and the Mastering Technology Enterprise (MTE) program.