How would a low-cost leader strengthen their leadership role through implicit threats from a competitor? Give at least one example of such a strategy. Finally, when market leaders recognize the threat of low-priced competitors, they usually try to match or exceed their prices. However, all available evidence shows that price wars do not work in favour of incumbents. Not only are below-cost prices illegal in many countries, including the United States, but low-cost business models are designed to make money at low prices — a fact executives tend to forget. In a race to the bottom, the challengers are always ahead of the incumbents. For example, Aldi, Dell, E*Trade and Southwest Airlines held up more than well in the late 1980s when Carrefour, Compaq, Fidelity and United unleashed price wars designed to drive challengers out of business. Price leadership is the strategy of setting prices significantly lower than the competition. It most often occurs in an oligopoly or a state of limited competition. If there is a lot of competition with different qualities and value propositions, each company can set prices relatively independently. Where there is little competition, a dominant player can use its position to effectively price goods and services for the entire market. A two-pronged strategy will only yield results if the low-cost operation is launched offensively to make money – not as a purely defensive ploy to hurt low-cost rivals. Companies should let their old and new businesses compete with each other and incorporate cannibalization estimates into business models and financial projections.
Dow Corning`s creation of Xiameter is a great example of how companies should take advantage of this two-pronged approach. Although Dow Corning held a 40% share of the global silicone market in 2000, Dow Corning found low-cost competitors to enter the industry. Instead of lowering prices, she decided to start a low-cost business. Two years later, after segmenting the market and identifying potential customers, Dow Corning founded Xiameter. Compared to Dow Corning, which sells 7,000 products, the subsidiary sells only 350, all of which face intense competition from low-cost suppliers and the parent company. Xiameter`s limited reach prevents it from consuming its parent company`s sales. How would a low-cost leader impose his leadership by implicit threats of arrival? How does the company become a leader in low-cost pricing? Discuss the specific type of market structure that implies that the threat strategy can be adjusted. A low-cost leader would strengthen the lead by offering offers or lowering the price that matches the price of competitors with higher costs. This will reduce the chances that rivals will not imitate. Low-cost companies typically use this strategy to increase their sales volume and market share for goods and services. In addition, the desire to obtain lower prices may deter competitors and potential market participants. This is usually a common practice in many retail stores or large retail stores.
Companies find it difficult, but strangely reassuring, to take on adversaries whose strategies, strengths and weaknesses resemble their own. However, their obsession with known competitors has blinded them to threats from disruptive and low-cost competitors. A two-pronged strategy will only yield results if the low-cost operation is launched offensively to make money – not as a purely defensive ploy to hurt low-cost rivals. The criterion for a price leader is usually the company that has controlled a disproportionate market share over a long period of time. The market leader is well known in this field and is often the “standard” supplier of goods. In many cases, followers in this field assume that the market leader has a glimpse into the future of the market, and therefore it makes sense to follow the leader`s pricing strategy. Over the past five years, I have studied about 50 established businesses and 25 low-cost businesses. My research shows that ignoring low-cost competitors is a mistake, as it ultimately forces companies to leave entire market segments. When market leaders react, they often trigger price wars and hurt themselves more than challengers. Companies that become aware of this fact usually change course in two ways.
Some become more defensive and try to differentiate their products – a strategy that only works if they can meet strict conditions, which I`ll describe later. Others are going on the offensive by creating their own low-cost companies. This so-called dual strategy is only successful if companies manage to generate synergies between existing and new companies. If they can`t, companies would be better off trying to become solution providers or, as difficult as it may be, low-cost players. However, before analyzing the different strategic options, I need to dispel some myths about low-cost businesses. Companies are taking different approaches to compete with low-cost suppliers. Some differentiate their products – a strategy that only works in certain circumstances. Others are creating their own low-cost airlines, as many airlines did in the 1990s – a so-called dual strategy that only succeeds if companies can generate synergies between existing businesses and new ones, as financial services firms HSBC and ING have done.
Without synergies, airlines would do better to try to become low-cost players, a difficult feat achieved by Ryanair in the 1990s, or solution providers. Xiameter found that it had to offer products at prices 20% lower than the Dow Corning in order to take on other low-cost players. He uses all the tactics in the book to do so. Instead of fast deliveries, Xiameter promises a shipment date of seven to 20 days from the order date so it can schedule the manufacture of its products when Dow Corning`s factories are idle. It does not offer technical services, so it has not invested in a service facility. To maintain the efficiency of its supply chain, Xiameter only sells full loads of trucks, tanks or pallets of products. Customers place orders on a website or pay an additional $250 to order by email or phone. Once set, a shipping date cannot be changed unless the customer pays a 5% fee. In the case of an urgent order, a premium of 10% is incurred; and the cancellation fee is 5%. These rules facilitate production planning. Xiameter only offers 30-day supplier credits, which helps reduce the need for working capital, and evaluates products in just six currencies to limit currency risk. In 2001, Dow Corning had sales of $2.4 billion; In 2005, Dow Corning and Xiameter combined sales were $3.9 billion.
This increase helped the parent company convert a loss of $28 million in 2001 into profits of $500 million in 2005. The strategy has also helped customers better appreciate the additional benefits offered by Dow Corning and charge high prices. Conventional wisdom suggests that the subsidiary should be housed separately because the sources of competitive advantage of low-cost operations are not the same as those of the parent company. By building a self-sustaining entity, an established company can create a start-up with structures, systems, people, and values different from its own. Because it is independent, low-cost operations will be more responsible and less likely to be stifled by the parent company`s fear that the subsidiary will cannibalize its sales. As the case of airlines shows, independent entities are necessary, but not sufficient, for the success of a dual strategy. This is because shared ownership often imposes restrictions on low-cost operations. For example, unions have not allowed U.S. airlines to pay employees of their low-cost subsidiaries wages as low as those of Southwest Airlines and JetBlue.
Not surprisingly, these subsidiaries were unable to take off. When companies find that the low-cost customer segment is large, they often launch low-cost businesses themselves. Due to their years of experience in the industry as well as their abundant resources, established companies are often deceived into believing that they can easily replicate low-cost offerings. In addition, the business models of these competitors seem simpler than theirs. In the 1990s, for example, all major airlines launched no-frills second airlines – Continental Lite, Delta Express, KLM`s Buzz, SAS`s Snowflake, US Airways MetroJet, United Shuttle – to compete with low-cost airlines. All of these second carriers have since been closed or sold, showing how difficult it is for companies to take advantage of the dual strategy. The third condition for a successful differentiation strategy is simple: companies must balance costs and benefits before implementing them. It takes time. After years of restructuring, Hewlett-Packard was finally able to catch up with Dell in the PC business. HP has reduced Dell`s cost advantage from 20% to 10%, and as average PC prices have fallen, the absolute price difference is relatively small.