How Can You Beat Low-Price Competitors At Their Own Game?
What do Sky TV, Renault-Nissan, Gillette, and Singapore Airlines all have in common? Well, these four global brands are successfully competing with low-price players in their respective fields by running a low cost business model in addition to their core model.
It’s working, not only because they’re attracting clients in droves but because of the higher profitability. For example, Renault’s low-cost brand Dacia has been the fastest growing brand in Europe since 2004 and currently boasts operating margins of around 15%. Compare that to the rest of the Renault group itself as it struggles with 5%. Meanwhile, Singapore Airlines Group’s low-cost airline Scoot is growing faster and is more profitable than its parent company, despite it being internationally renowned for its premium service and superior prices.
This is a revolution of sorts. Back in 1982 when Tom Peters and Robert Waterman Jr published their seminal work, “In Search of Excellence”, one of the key factors they identified behind successful companies was their propensity to ‘stick to the knitting’. Or to put it another way, the ability to work out what you are good at and then focus on it. More than three decades later, it seems that many big corporations are still adhering to this principle. But is this single strategy approach relevant in today’s highly competitive environment?
Our research proves the opposite. We feel major companies should develop and operate a portfolio of targeted strategies, by assembling their key resources in a variety of business models. There are six good reasons for introducing diversity in one’s portfolio of business models:
- Use the right weapons to fight low-prices rivals on equal footing. There’s hardly any industry that is not under the threat from low-cost new entrants. Even in an industry long regarded as immune from intense price rivalry, such as cosmetics, leading firms are shaking in front of low-cost players like the Italian Kiko or the German Essence, which are slashing prices by 200% or 300%. Unless the cost structure of the underlying business model is not profoundly altered, tweaking the mainstream business model to drive down prices will only degrade profitability. Conversely, selling value to justify higher prices to clients looking for low prices can only result in losing significant market shares. Just look at Carrefour, for long the second largest retailer in the world, now languishing in ninth position. With his failed policy of “reenchanting the hypermarket”, the late CEO Lars Olofsson suffered from the two evils of poor profitability and indifferent customers who were unmoved by attempts to revive the instore experience. At the other end of the spectrum, Gillette was smart enough to launch a low-cost version of its disposable razors for its Indian customers. Indeed, within the same national market, the Gillette “7 o’clock razor” is 15 times cheaper than the classic Gillette razors commonly found in developed countries!
- Preserve the mainstream brand. Cost-cutting plans, promotions and special offers damage the brand by undermining the value attributes and price legitimacy built up over years of hard struggle. To maintain their flagship brand image, a few established players, like IAG (the merger between British Airlines and Iberia) with Vueling or Singapore Airlines with Scoot, have instead successfully introduced low-cost brands which can compete in the price war. They are cashing in on the fact that the low-cost business model offers a variety of positioning: premium low-cost, “middle-cost”, ultra-low-cost. Stand-alone competitors are finding it hard to replicate.
- Capture all segments of a market. The key factor which segments many markets is a simple one – price. Running several business models concomitantly enables you to use a second brand to attract and contact a client. Car rental companies have embraced this challenge by running flagships brands, such as Avis, Hertz and Europcar alongside ‘no-frills’ options such as Thrifty, InterRent and Firefly. And the beauty of the approach is that it allows the organization to move a potential customer up or down the price range depending on their reaction to specific offerings.
- Grow the market. Established players often view low cost entrants and their policies as simply cannibalizing a market. But, in truth they are expanding it by embracing potential customers who could not afford existing products or services. Many purchasers of new Dacia used to only buy second-hand cars; clients of low-cost airlines or railways could not afford vacations. Sky TV learnt quickly, returning to the path of growth by launching its low-cost Now TV offer. Management claims that 90% of customers of Now TV had never considered taking a paid subscription beforehand.
- Leverage common resources. Redeploying existing resources to implement complementary business models creates hard to emulate cost advantages and barriers to dominance. AccorHotels, for example, has leveraged the massive resource it has built up – namely over 3,700 hotels in 92 countries, from budget to luxury – and marketed it digitally, in order to resist the seemingly inexorable march of disruptors such as Booking, Tripadvisor and Airbnb.
- Achieve superior financial results. Many organizations approach a diversification of their business strategy with a negative mindset, feeling that they are somehow betraying their DNA and sometimes their partners. But business model diversification may actually be the only route to protect market shares and improve financials. Vueling, the low-cost carrier of IAG had an operating margin of 15% in 2013, when the group’s operating profit was only 3%.