Tuesday, April 12, 2011

Strategies to Fight Low-Cost Rivals

Written by Nirmalya Kumar, “Strategies to Fight Low-Cost Rivals” is a Harvard Business Review article the studies the strategies of many world renowned companies that have adopted low cost strategies as their competitive advantage in the marketplace. The article analyzes low-cost strategies and offers suggestions to combat low-cost strategies.

The article labels low-cost companies as disruptive competitors that capitalize on the advantages of deregulation, globalization and technological innovations. As in our required readings, Dell, Wal-Mart, Aldi and Vanguard Group are cited as companies who have implemented successful low-cost strategies.

In offering alternatives to combat low-cost competitors the author cites the works of Clayton Christensen’s research on competitive innovations as applicable strategies to combat low-cost competitors because low-cost competitors have the same effect in the marketplace as disruptive technological innovations. According to Kumar, her studies of 50 incumbents and 25 low-cost companies illustrate that the most common mistake that incumbent business make is to ignore low-cost competitors. This often results in the ostracizing of incumbents from the marketplace.

On the other hand, when market incumbents respond they do it in ways that adversely affect them in the long run. The most common of these suicidal business tactics are price wars. Incumbents that are smarter attempt to differentiate their products or launch new low-cost ventures. The implementation of these two strategies occurs with many constraints so it must be undertaken cautiously and implemented meticulously to ensure success.

As a businessman I would never like to be threatened by low cost competitors. However, this is wishful thinking because we live in the era of deregulation, globalization and technological innovations. If I were the head of a big business and I am faced with a low-cost competitor I would chose to differentiate my product. Establishing personal relationships are a deterrent to low-cost competition is a little more difficult but not impossible. On the other hand, if I were the head of a small business I would definitely attempt to establish a reputation for having personal relationships with customers. Similarly, I would also try to differentiate my products if it is cost effective. Of course this would depend on the type of business that I am in.

What would your strategy be if you where faced by a low-cost competitor? Have any of you been in this position in the past?

Source: http://hbr.org/2006/12/strategies-to-fight-low-cost-rivals/ar/1

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