– EXECUTIVE SURVEY RESULTS
Low-cost competition is a growing challenge to Nordic-based industrial companies. These companies, traditionally focusing on premium offers, find it challenging to be competitive in low-end segments.
Therefore, they tend to ignore the problem as long as it does not
affect the core business. However, given enough time to grow lowcost competitors will eventually threaten premium segments as well.
Three key issues to address
The findings in this newsletter are based on a study performed by Triathlon Consulting
Group, where 35 executives from Nordic-based industrial companies were interviewed.
The study shows that in order to compete with low-cost actors, three key questions
have to be addressed:
1 What strategy needs to be adopted?
1.
2 How to mitigate the challenge of low-cost competition in mature markets?
2.
On a high level, strategies against
low-cost competition are decided
by their focus on providing performance value, relational value and
price value. In practice, a company
will rely on a mix of these value
strategies.
Performance value strategies aim for superior product performance, such as applications and quality. Relational value strategies focus on deepening the long-term
relation with a customer through a solutions
NEWSLETTER
LOW-COST
COMPETITION
CHOOSING
LOW-COST
COMPETITION
STRATEGY
and aftermarket-driven approach. Finally,
price value strategies achieve competitiveness by offering the lowest possible price.
Performance
Strategy
Relation
Price
Strategies against low-cost competition
STUDY INSIGHTS:
Strategy for mature markets effective, less so for developing markets
The studied companies are not very concerned about low-cost competition in
markets where customers are interested in performance value and relational
value, since low-cost actors are largely unsuccessful in competing on those
terms. In such mature markets, mitigating the potential future challenge from
low-cost competition before it arrives is a priority.
However, the study indicates that low-cost competition is more troublesome in
markets where most customers are mainly interested in price value. Finding
ways to become competitive on price is thus a key challenge for companies
wanting to beat low-cost competition, especially in developing markets.
Q1 2015
3 How do you compete with low-cost actors in developing markets?
3.
1
Emphasizing relational value to prevent
low-cost actors from entering your markets
NEWSLETTER
The study suggests that the best way to raise barriers
for low-cost competition to enter a market is to work
with relational value strategies. Establishing close ties
to customers, and ideally integrating into their processes, can make it very difficult for low-cost competitors
to enter since they tend to want to sell their products
in volume with a minimum of investment in relations.
Top performers educate their customers
MITIGATING THE CHALLENGE OF LOW-COST
COMPETITION IN MATURE MARKETS
Act before it is too late
The study shows that low-cost actors often start in marginal
markets and segments, where economies of scale can be
achieved before moving on to more attractive ones. At this
stage, many simply ignore the low-cost competition. However,
this is a crucial time for action, where the possibilities of
preparing for the entry of low-cost competition are still open
before it is too late.
Unless proactive measures are taken, low-cost competitors can attack companies’ mature markets with highly
price-competitive offers from their strong positions in developing markets. At first, this might only attract customers
looking for the lowest possible price. Over time however, the
low-cost competitors will incrementally improve the performance and quality of their offers, eventually becoming good
enough for most customers while retaining a cost advantage.
The companies that are most successful in competing with low-cost competitors invest in educating
customers about the value of their offers, as well
as in helping them understand that their offers can
meet needs the customers didn’t yet know they had.
For example, many companies work with educating
their customers about the differences in reliability
when comparing to a low-cost actor, often revealing
hidden costs due to quality problems. Conversely,
quality assurance coupled with extensive aftermarket services allow some companies in the study to
point to significantly better total lifecycle costs and
cost of ownership, something that is not apparent
when looking only at the sticker price.
Waking up to the challenge
Many companies in the study have yet to experience the
effects of low-cost competitor entry into their mature markets. Because of this, there is a lack of appreciation of the
problem and what can be done to deal with it. However, the
companies often point to the likelihood of increased low-cost
competition in the years to come. This trend underlines the
urgency and need to act quickly once low-cost competition
starts appearing on the horizon.
Low-cost competitors build
scale in developing markets first
China
Other Developing
Markets
Western
Markets
Example of typical low-cost competitor expansion strategy
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MEETING LOW-COST COMPETITION
IN DEVELOPING MARKETS
The study suggests the following steps for successfully
overcoming low-cost competition in developing markets:
Even if margins are unattractive, carefully consider if
exiting is aligned with the company’s long term strategy
before doing so. Instead, the potential of growing with
developing markets over time should be taken into
consideration.
Use separate low-end brand
Review the possibility to use a separate low-end brand
with the freedom to become competitive in the low-end.
This opens the possibility of allowing the low-end brand to
focus on cost optimization without risking brand dilution.
Future growth in developing markets
Although many companies confess to be struggling against
low-cost competition in developing markets, such markets
are also the most likely source of future growth. Viable strategies against low-cost competitors in developing markets
are therefore a high priority.
Don’t exit
NEWSLETTER
The companies participating in the study are
more or less untroubled by low-cost competition in mature markets. However, competing
on price is more common in developing markets and this is where low-cost competition
becomes problematic. The offers of low-cost
competitors are well-suited for these markets
and the investigated companies struggle,
both to offer prices in line with the low-cost
competitors’ and to communicate the value
of their more premium offers.
Leverage all your resources
While a separate low-end brand prevents brand dilution
and allows to establish brand recognition as price-value
focused, there is nothing to stop it from taking advantage
of the resources of the entire company. The companies
participating in the study have access to infrastructure
and support that is not available to low-cost competitors.
Deal with it sooner rather than later
The idea of competing mainly on price while incrementally improving capabilities is hardly new, although
globalization has made differences in price levels to
become steeper than perhaps ever before. Low-cost
competition is likely to continue to be an issue for
Nordic-based industrial companies for the foreseeable
future and it would be wise to address that issue headon sooner rather than later.
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Triathlon Consulting Group
Triathlon Consulting Group is a growing management consultancy dedicated to
operations improvement with a prestigious track record. Our clients are well known
large multinational companies, mainly within technology intensive industries.
Triathlon is partner owned, independent and hence a truly reliable consulting
partner in operations improvement.
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414 51 Göteborg
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+46 31 704 12 90
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By combining innovation and best practice, we develop substantial value to our
clients through long-term relationship and genuine understanding of business
needs in the industries we operate within. Triathlon’s core business is our clients’
‘out of the ordinary’ operational management issues.
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Operations
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Developing strategies
and governance to
reach objectives
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by combining innovation and best practice
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and operations
Need a success story of your own?
– Triathlon develops your business
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