🔥🔥🔥 Low Cost Strategy
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Porter's Generic Strategies - Simplest explanation with examples
All over the world, especially in Europe and North America, organizations that have business models and technologies different from those of market leaders are mushrooming. Such companies offer products and services at prices dramatically lower than the prices established businesses charge, often by harnessing the forces of deregulation, globalization, and technological innovation. By the early s, the first price warriors, such as Costco Wholesale, Dell, Southwest Airlines, and Wal-Mart, had gobbled up the lunches of several incumbents.
These and other low-cost combatants are changing the nature of competition as executives knew it in the twentieth century. What should leaders do? My research shows that ignoring cut-price rivals is a mistake because it eventually forces companies to vacate entire market segments. When market leaders do respond, they often set off price wars, hurting themselves more than the challengers. Companies that wake up to that fact usually change course in one of two ways. Some become more defensive and try to differentiate their products—a strategy that works only if they can meet a stringent set of conditions, which I describe later. Others take the offensive by launching low-cost businesses of their own. This so-called dual strategy succeeds only if companies can generate synergies between the existing businesses and the new ventures.
If they cannot, companies are better off trying to transform themselves into solution providers or, difficult though it is, into low-cost players. Before I analyze the various strategy options, however, I must dispel some myths about low-cost businesses. Be it in the classroom or the boardroom, executives invariably ask me the same question: Are low-cost businesses a permanent, enduring threat? They cite the experience of U. What they forget is that low-cost airlines soon reemerged. Successful price warriors stay ahead of bigger rivals by using several tactics: They focus on just one or a few consumer segments; they deliver the basic product or provide one benefit better than rivals do; and they back everyday low prices with superefficient operations to keep costs down.
The chain sells more of each product than rivals do, which enables it to negotiate lower prices and better quality with suppliers. Another efficiency stems from the fact that Aldi sets up outlets on side streets in downtown areas and in suburbs, where real estate is relatively inexpensive. Its stores display products on pallets rather than shelves in order to cut restocking time and save money. Customers bring their own shopping bags or buy them in the store. Aldi was one of the first retailers to require customers to pay refundable deposits for grocery carts. Shoppers return the carts to designated areas, sparing employees the time and energy needed to round them up.
At the same time, Aldi gets the basics right. There are several checkout lines, so wait times are short even during peak shopping hours. Its scanning machines are lightning fast, which allows clerks to deal quickly with each shopper. Aldi sells products far cheaper than rivals do. They earn smaller gross margins than traditional players do, but their business models turn those into higher operating margins. Because of those returns and high growth rates, the market capitalizations of many upstarts are higher than those of industry leaders, despite the larger equity bases of the latter. Interestingly, low-cost companies stay ahead of market leaders because consumer behavior works in their favor. My research suggests that if a business gets a customer to buy its products or services on the basis of price, it will lose the customer only if a rival offers a lower price.
Only new entrants with even lower cost structures can compete with the price warriors. As its employees grew older, those costs excluding fuel costs rose: By , they were 6. However, JetBlue, which started flying in , spent only 4. Clearly, JetBlue poses a stiffer challenge to Southwest than the traditional airlines do. They can observe without engaging the competitor. That wait-and-watch strategy often works for companies that market products for people at the very top of the pyramid, such as wines, perfumes, and cosmetics.
Bottled water is a superpremium product, and store brands serve consumers who rarely buy it. Its customers are typically people in their twenties and thirties, many of whom cannot afford the all-inclusive packages other cruise lines offer. Although easyCruise is doing well, incumbents such as Royal Caribbean and Cunard have left this new competitor alone rather than diverting resources to attack it. That may be an exception to the rule. Most low-cost players alter customer behavior permanently, getting people to accept fewer benefits at lower prices. Moreover, low-price warriors are aided by the fact that consumers are becoming cynical about brands, better informed because of the Internet, and more open to value-for-money offers.
When market leaders finally acknowledge the threat from low-cost rivals, they usually try to match or beat their prices. Not only is pricing below cost illegal in many countries, including the United States, but also low-cost business models are designed to make money at low prices—a fact that executives tend to forget. In a race to the bottom, the challengers always come out ahead of the incumbents. Internet bookings are more attractive to the leisure travelers who use low-cost carriers than to business travelers, who often fly to multiple destinations. Consequently, when traditional airlines set up Internet-based booking systems, the impact on their costs is limited. Third, most incumbents participate in industry-wide reservation systems such as Sabre, which robs them of control over some seats.
Finally, the traditional airlines have set up networks of travel agents, which would rebel if the carriers made a complete shift to direct bookings. For all those reasons, traditional carriers are unable to reduce their booking costs to the levels the discount airlines have achieved. Slashing prices usually lowers profits for all incumbents without driving the low-cost entrant out of business. I learned that firsthand while serving as a consultant to a European telecom-equipment provider that was competing against traditional rivals as well as a low-cost Asian competitor for a multimillion-dollar contract in Africa.
Not surprisingly, the low-cost company won the contract. In addition, although the telecom giants would not have made profits on their lowest bids, the Asian contender seemed likely to do so. My research shows, however, that three conditions determine their efficacy. That approach works well because the Danish company also keeps introducing new products, cultivates an upscale brand image, and invests time and money in creating cool-looking retail outlets. Second, companies must be able to persuade consumers to pay for benefits. The ability to do so usually depends on the products they sell. However, when the company deployed a similar strategy for Duracell batteries by emphasizing longer life, many consumers balked at paying higher prices after a certain point. Eventually, Gillette had to back away from this differentiation gambit.
Many companies find it tough to persuade consumers to pay for additional benefits. A small premium for greater services or benefits is a powerful defense, as Target and Walgreens have shown. Target stocks inexpensive kitchenware and clothes developed by well-known designers such as Michael Graves and Isaac Mizrahi. It charges a bit more for products of better quality and design than those Wal-Mart sells. In like vein, Walgreens emphasizes convenience by setting up its stores close to shopping centers and providing drive-through windows for pickups, promising short checkout lines, and offering easy navigation because of smart store layouts.
Both Target and Walgreens have therefore managed to hold their own against Wal-Mart. All too often, though, incumbents incur huge costs in order to deliver benefits, forcing them to ask for price premiums so large that they drive away consumers. The third condition necessary for a successful differentiation strategy is simple: Companies must bring costs and benefits in line before implementing it. That takes time. After years of restructuring, Hewlett-Packard may finally be catching up with Dell in the personal computer business. Consumers are shopping for HP computers once again because of such benefits as instant delivery and the ability to see, feel, and touch products in stores. Unless sizable numbers of consumers demand additional benefits, however, companies may have to yield some markets to the price warriors.
Take the case of British Airways, which initially ignored low-cost rivals such as easyJet and Ryanair; then set up a low-cost carrier called Go, which it sold in to easyJet; and finally differentiated its services in several ways. BA now concentrates on long-haul flights, for which there are no low-cost carriers. In the short-haul market, the carrier has held on to some market share by emulating the best practices of low-cost rivals, such as persuading customers to use electronic tickets. On every flight, BA offers a small number of economy class seats at prices close to those that low-cost carriers charge. Because of its stranglehold on landing slots at Heathrow, a convenient and popular airport, it still attracts some short-haul customers.
Even so, BA has reduced capacity on several flights to destinations in Europe, effectively conceding victory to low-cost carriers. Strategies that help an established player coexist with low-cost rivals can work initially, but as consumers become more familiar with low-cost options, they tend to migrate to them. That has left the traditional players scrapping with one another for a shrinking market, charging ever higher prices to fewer and fewer customers. These companies have to cope with smaller top lines even though they still have high overhead costs.
That wreaks havoc on their bottom lines. When companies discover that the low-price customer segment is large, they often set up low-cost ventures themselves. Because of their years of industry experience as well as their abundant resources, incumbents are often seduced into believing that they can easily replicate cut-price operations. Moreover, the business models of such rivals appear to be simpler than their own. All these second carriers have since been shut down or sold off, showing how tough it is for companies to use the dual strategy. The low-cost operations offer customers a small number of products—term deposits, savings accounts, and insurance—through cost-efficient distribution channels such as the Internet.
Since they reach out to consumers the flagship banks cannot afford to serve, the no-frills businesses protect the parents. The flagship operations combine the funds the subsidiaries raise with their own, which allows them to make investments cost-effectively. That approach helps both parent and subsidiary. A distinct brand helps communicate that fewer services go along with lower prices. Those crypto fans who believe the Brave ecosystem that is made up of users, creators, and advertisers will grow further need to keep BAT-USD on their shopping list. In other words, Chainlink aims to link independent blockchain projects to real-world data. Incorporating real-world data could mean enormous potential for blockchain networks in the long-run, and LINK-USD might become a leading crypto standard among decentralized oracle networks.
The crypto deserves further due diligence and a possible place in long-term portfolios. Our next altcoin, Chia, is not necessarily a low-cost, or a penny altcoin. But it is a new crypto that started transactions in early May. It has quickly caught the attention of investors who regard it as a green alternative to Bitcoin. Since its launch, the price of Chia has been volatile. Crypto fans have welcomed the news. Chia plans to go public on an equity exchange in the U.
Therefore, investors who believe that disk space instead of computing power will provide catalysts to acquiring tokens should keep XCH-USD on their radar. Chiliz operates in the non-fungible token NFT space, which has become the latest global digital token phenomenon. Such blockchain-based tokens are certificates of ownership of virtual or physical assets. Most of these token are currently built on the Ethereum platform.
It has become the leading blockchain in the esports arena. Similarly, on Socios. These clubs can set up their own tokens and sell fans special perks, such as voting rights on team jersey designs or early access to game tickets. There are over sports teams on the platform. The company is beginning to grow its U. The aim is increased audience monetization and fan engagement. Sports fans can certainly push Chiliz further up in the coming months. Participation by sports fans could continue to provide tailwinds for the Chiliz token. As a result, many hail Holochain as a cheaper, more scalable alternative to blockchain. Users do not have to receive confirmation for every transaction from network participants or record it on the blockchain.
Instead each peer in the network stores its own data locally within its device. Peer-to-peer P2P web applications can, therefore, function faster without the need for a centralized infrastructure. If you believe the technology behind Holochain could increase in importance, then you should consider HOT-USD as a possibly crypto to add to your portfolio. Finally, here is a list of exchanges where you can buy the altcoin. Next up on our list of low-cost altcoins and crypto names is the VeChain Thor Blockchain , an enterprise level public blockchain platform. It aims to make supply chains transparen t through the smart contract feature of blockchains. Developers of Vechain aim at completely eliminating the threat of the market of counterfeit goods, using the potentialities of smart contracts and blockchain technology.
VeChain works on the Proof-of-Authority algorithm , offering a higher level of scalability for enterprise solutions. As the leading crypto in supply chain tracking that offers a technological solution to logistics problems, VET-USD deserves your attention. Instead, each node only maintains information related to its partition, or shard. The platform also has its own programming language, Scilla. Its mainnet was launched in January On the date of publication, Tezcan Gecgil did not have either directly or indirectly any positions in the securities mentioned in this article.
The opinions expressed in this article are those of the writer, subject to the InvestorPlace. Tezcan Gecgil, Ph. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician CMT examination. Her passion is for options trading based on technical analysis of fundamentally strong companies.
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