Tuesday, October 13, 2009

Who wins in tough times … and beyond: The growing challenge of low cost competitors.

A few weeks ago IMD organized a business forum in Helsinki, Finland. Professor Adrian Ryans, who has focused his research on the topic for the passed few years, had come to Finland for the occasion. (Find a few video clips below this post)

The event was hosted by Heikki Norta, SVP Corporate Strategy at Nokia and was held at the Nokia house in Espoo outside of Helsingfors.
Business Forum in Finland September 17

IMD Alumni Club President Veli-Pekka Elonen of Egon Zehnder and IMD Alumni Club board member Peter Rostas of Nokia welcomed the close to 120 participants by sharing a few personal memories from their time at IMD. We also had a chance to hear from Heikki Norta about his views on the topic.

Professor Ryans led off his presentation by explaining how low cost competition is becoming a big challenge in many industries. Airlines, pharmaceuticals, financial services and retailing are just a few examples. And downturns tend to accelerate this trend as people and companies are more cost conscious. For example, who would not consider buying a wedding dress by designer Isaac Mizrahi from big box retailer Target for as little as $150 rather than spending thousands at a designer store? We may chuckle at the example but the reality is that customer statistics are painting a clear picture. Many are choosing a cheaper option. Using the airline industry as an example, Ryans presented some staggering statistics showcasing a clear shift within the industry. In the last year only Ryanair and easyJet have seen passenger growth while traditional carriers have lost ground. Roland Bush, Lufthansa board member said the following in June, 2009: “Our competitors are now Air Berlin, Ryan Air and easyJet.. not Air France/KLM and British Airways.”

Another example was the grocery industry in the UK where German discounters Aldi and Lidl were gaining in popularity. To share insights on how these low cost players actually do it, Ryans showed a behind the scenes movie from a Lidl location in France.

These trends were however not only prevalent for consumer markets but also for business to business markets. And in many industries the challengers are coming from developing countries in Asia, particularly China and India. Why do these players represent a serious long-term challenge?

“Many have a huge domestic market. Some have refined their strategies in an extremely competitive environment. Others have had to compete with leading multinationals in their home market almost from the beginning and when they appear in 'Western' markets they may have unbeatable economies of scale,” Ryans explained.

The key low cost threat often comes from companies successfully competing in the “good enough” segment. So often, this segment has very high growth rates compared with the premium segment. The gap between the premium offering and the “good enough” offering is decreasing and as low cost competitors improve their quality and narrow in on the technology gap.

So what can premium brand companies do in order to respond to low cost competition?

One option is of course to move into the mid-tier segment and challenge the low cost competition head-on. A second option is to distance business from low cost competitors by increasing performance value. A third option is to increase the relational value for the client.

Benefits in choosing option one include meeting real market needs, gaining economies of scale and building relationships to name a few. Doing so did however put the company at risk for potential cannibalization, confusion around business model and it may even damage the brand image. ING Direct, Danfoss and Nokia were named as examples.

In order to choose option two, Ryans emphasized the importance of truly understanding the needs of the customer – What would really create the value that the customer would be willing to pay a significant premium for? It was of course also imperative to deliver supreme quality, performance or style.

According to Ryans, to differentiate through creating a strong relationship with the customer it was important to have a long term commitment. Companies that have succeeded in this space have often started by focusing on the performance value and over time moved towards a more relational approach. Examples that were mentioned included Tetra Pak, GE and IBM Global Services.

To conclude, Ryans emphasized the relevance of low cost competition: Low cost competition is a big and growing challenge for many companies and it is not going to go away. It should not be ignored – You must respond to it!

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