Summary. Reprint: R0612F Companies find it challenging and yet strangely reassuring to take on opponents whose strategies, strengths, and weaknesses resemble their own. Their obsession with familiar rivals, however, has blinded them to threats from disruptive, low-cost competitors. Successful price warriors, such as the German retailer Aldi, are changing the nature of competition by employing several tactics: focusing on just one or a few consumer segments, delivering the basic product or providing one benefit better than rivals do, and backing low prices with superefficient operations. Ignoring cut-price rivals is a mistake because they eventually force companies to vacate entire market segments. Price wars are not the answer, either: Slashing prices usually lowers profits for incumbents without driving the low-cost entrants out of business. Companies take various approaches to competing against cut-price players. Some differentiate their products—a strategy that works only in certain circ*mstances. Others launch low-cost businesses of their own, as many airlines did in the 1990s—a so-called dual strategy that succeeds only if companies can generate synergies between the existing businesses and the new ventures, as the financial service providers HSBC and ING did. Without synergies, corporations are better off trying to transform themselves into low-cost players, a difficult feat that Ryanair accomplished in the 1990s, or into solution providers. There will always be room for both low-cost and value-added players. How much room each will have depends not only on the industry and customers’ preferences, but also on the strategies traditional businesses deploy.
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The Idea in Brief
Formidable price warriors—such as Germany’s Aldi supermarkets, India’s Aravind Eye Hospital, China’s Huawei telecommunications—have gobbled up established players’ lunches. Yet many incumbents ignore these rivals, assuming—mistakenly—that extreme discounting will drive them out of business. Other established players mount price wars, which only slashes their profits without disrupting low cost contenders’ lean business models.
How to fight low cost rivals? Kumar describes four alternative strategies: 1) Differentiate your offerings, 2) augment your traditional operations with low cost ventures, 3) switch to cross-selling products and services as integrated packages, and 4) become a low cost provider yourself.
Choose the strategy that best fits your company’s situation. For example, when Irish airline Ryanair realized it couldn’t compete with Aer Lingus using modest price discounts, it transformed itself from a high cost, traditional carrier into a low cost provider. Its revenues jumped 28% in just one year, and it boasted the highest punctuality rate of all the European airlines.
The Idea in Practice
Kumar offers four strategies for battling low cost rivals:
Differentiate your offerings#•You can combine numerous differentiating factors (e.g., cool products and continuous innovation).•Consumers want the benefits your new offerings would provide.•You can reduce the costs of the benefits you would offer.#Computer maker HP’s restructuring has shrunk rival Dell’s cost advantage from 20% to 10%. And consumers appreciate the added benefits HP offers, such as instant delivery and the ability to see, feel, and touch computers products in stores.Add a low cost business#Your traditional operation will become more competitive as a result.•Your low cost venture will make more money than it would have as an independent entity.•You can allocate adequate resources to the low cost unit.#Dow Corning’s Xiameter unit—a low cost provider of silicone products—sells only 350 of Dow’s 7,000 offerings, so Xiameter doesn’t cannibalize its parent’s sales. It schedules manufacturing when Dow’s factories are idle, sells only large orders, and offers no technical services. After launching Xiameter, Dow turned a $28 million loss in 2001 into a $500 million profit in 2005.Switch to selling solutions#There are no synergies possible between your existing enterprise and a low cost business.•The integration of your products and services provides unique value to consumers.#Australian mining company Orica sold explosives to stone quarries. When low cost players emerged, Orica began providing a new service: laser profiling rock faces to identify the best places to drill holes for explosives. The service improved customers’ rock yields, reducing downstream processing costs—and making customers dependent on the company. Orica’s average sales are bigger than when it sold only explosives.Become exclusively a low cost provider#There are no synergies possible between your existing enterprise and a low cost business.•A significant segment of your consumer market buys based on price.•You are willing to acquire significant new business capabilities.#Ryanair changed every aspect of its business model to become a low cost player. It replaced its entire diverse fleet with just one type of plane, began operating from secondary airports, and moved from travel agency bookings to direct booking through call centers and the Internet. It also eliminated business class, free meals, seat assignments, and cargo carrying.
It’s easier to fight the enemy you know than one you don’t. With gale-force winds of competition lashing every industry, companies must invest a lot of money, people, and time to fight archrivals. They find it tough, challenging, and yet strangely reassuring to take on familiar opponents, whose ambitions, strategies, weaknesses, and even strengths resemble their own. CEOs can easily compare their game plans and prowess with their doppelgängers’ by tracking stock prices by the minute, if they desire. Thus, co*ke duels Pepsi, Sony battles Philips and Matsush*ta, Avis combats Hertz, Procter & Gamble takes on Unilever, Caterpillar clashes with Komatsu, Amazon spars with eBay, Tweedledum fights Tweedledee.
A version of this article appeared in the December 2006 issue of Harvard Business Review.
As an expert in business strategy and competitive dynamics, I have a comprehensive understanding of the concepts discussed in the article "How to Fight a Price War." My expertise is grounded in years of research and practical experience, making me well-equipped to provide insights into the strategies outlined in the article.
The central theme of the article revolves around the challenges that companies face when dealing with low-cost competitors and the need to adopt effective strategies to counter their disruptive influence. The article highlights the case of successful price warriors like Aldi and offers four alternative strategies for incumbents to compete against such rivals:
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Differentiate Your Offerings:
- Combine various differentiating factors, such as innovative products.
- Ensure that consumers value the benefits offered by your differentiated products.
- Focus on reducing the costs associated with providing these benefits.
- Example: HP's restructuring, which reduced Dell's cost advantage, and HP's added benefits like instant delivery and in-store product experience.
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Add a Low-Cost Business:
- Augment traditional operations with a low-cost venture to enhance competitiveness.
- Ensure that the low-cost venture contributes more profit within the existing business structure.
- Allocate sufficient resources to the low-cost unit.
- Example: Dow Corning's Xiameter unit, which operated independently, scheduling manufacturing during idle times and selling large orders, leading to increased overall profitability.
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Switch to Selling Solutions:
- When no synergies exist between the existing enterprise and a low-cost business, integrate products and services to offer unique value.
- Provide integrated solutions that benefit consumers.
- Example: Orica, a mining company, transitioned from selling explosives to offering a service that improved customers' rock yields, reducing downstream processing costs and making customers dependent on the company.
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Become Exclusively a Low-Cost Provider:
- When no synergies exist between the existing enterprise and a low-cost business, commit to being a low-cost player exclusively.
- Target a significant segment of the consumer market that prioritizes price.
- Be willing to acquire new business capabilities.
- Example: Ryanair's transformation into a low-cost player involved changes to its entire business model, including fleet, operations, and customer interactions.
In essence, the article emphasizes the importance of strategic flexibility and the need for companies to carefully choose the most suitable approach based on their specific circ*mstances. It cautions against ignoring low-cost competitors and encourages a nuanced understanding of the competitive landscape to formulate effective responses.
