Strategies to fight low-cost rivals.

Abstract

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 cutprice 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 circumstances. 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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