Should Your Company Switch To a Low-Cost Strategy?

Expanded Porter Generic Strategies diagram When it comes to competitive advantage, the recession is re-dealing the cards. If you suspect that the value your company delivers is seen as being too rich, now is the time to do some forward-looking thinking to decide if the basis on which you are competing needs to change.

What is your strategy for dealing with increased price competition?

While credit was easy and spending by businesses and individuals was uninhibited, it was relatively easy for companies with approximate strategies to remain profitable. In a recession, buyers cut back and low-cost leaders have a serious advantage: they set lower prices  to maintain market share which puts pressure on all other competitors. If your firm is not the low-cost leader, what is your plan going forward?

  • Are your customers increasingly seeing your “value” as a nice-to-have they cannot afford?
  • How will you face a possible migration of customers towards lower priced offerings?
  • Do you expect these buying habits to change permanently?

Some experts predict that this will  indeed be the case at least in many industries driven by consumer spending such as: consumer electronics, home furnishings, home appliances, apparel, toys, even automobiles.

Now is the time to define more rigorously and more clearly the basis on which the company competes, and that includes examining the relevance of cost-based strategies.

strategy-triangle

The case of high-value strategies: Differentiation & Vertical Focus

These correspond to the  sections on the right side of the triangle. They include, among others, (a)  upper right (green-blue): innovative companies that offer a highly differentiated solution packaged to solve the problems of certain verticals, or (b) lower right (blue-green): vertical experts with a differentiated offering that endeavor to address the needs of a vertical through specialization. Low-cost is usually not the focus of these strategies; cost-control is just practiced as a matter of sound management.

For companies with these “premium” strategies, it maybe time to consider a much greater focus on cost, with all the consequences that entails internally on resource allocation and externally on the brand. To be successful, this transformation requires an across-the-board change in “footprint” for many functions and a change in the value proposition, not just a few tactical promotion-based price drops. The change can include:

  • reduced features in products – some products may be over-designed anyway.
  • more performance-based compensation programs for Sales – it’s severe but necessary in more competitive times;
  • reconfiguration and re-allocation of Customer Service – focusing service toward customers with the highest CLV;
  • strict ROI-based review of all demand generation programs – cost per lead, cost per contact etc
  • adjusted brand-building activities – always keep building the brand especially in difficult times when customers feel uncertain and can be impressed by a company’s response to the situation;

The transition from the right to the left of the triangle cannot be uncoordinated because of the obvious risk of ending-up in the undefined middle where there is no competitive advantage of any kind. Good execution is key as always.

Value rather than low-price still works in some cases but it really has to deliver

There is a range of companies for which the high-value, highly differentiated offering strategy will continue to be successful even with the downturn. Those are the companies that drive efficiencies and cost savings on substantial portions of companies’ expenses and investments. These differentiated offerings can resist the movement to lower prices because they maximize ROI or save cost: examples include software that maximizes the effectiveness on IT investments (eg. many SaaS solutions), systems that reduce operational inefficiencies (ERP), cut the cost of Sales (CRM), automate demand generation (Marketing automation software) etc. Of course, some reconfiguration of packages and price points may be required to facilitate customer acquisition in this climate.

Going for Cost leadership

This is a much more radical re-alignment, one that cannot be implemented in a few quarters. Companies with real cost leadership have been working at it for years. It is a class of competitive advantage that permeates all aspects of  the company and aligns with a long term view of what the brand stands for. We can think of the likes of Dell in its heyday and Toyota to this day. Cost leadership is a long term goal that needs to be implemented over time through shorter term initiatives in all aspects of the company.

To go low or not to go low? Know the competition

The decision to alter the strategy or not will highly depend on the nature of the competition. Some situations may not require any re-alignments. A group of companies surviving well in the undefined middle may not want to change anything. Michael Porter famously coined the expression “stuck in the middle” for those companies that have not resolutely chosen any specific strategy. The only time you may want to be “stuck in the middle” is when everyone else is stuck there too, and you are making money. But that is increasingly rare when the size of the pie is shrinking.

Accelerating the strategic shift

If the company has been prudent enough to accumulate some cash during the boom, a well timed and affordable acquisition can be the way to operate a strategic transition. Second tier cost-based competitors may be likely targets if they have been too aggressive about scaling to capture market share or penetrate other verticals during the good times.

“Give to Caesar what belongs to Caesar…”generic-strategies-porter

Porter fans will certainly have noticed that the triangular presentation above uses the generic strategies suggested by Michael Porter in his seminal diagram decades ago.

Michael Porter’s landmark insight was that there are two generic strategies that define how firms can compete: differentiation and cost advantage. He suggested adding an industry focus to either one, leading to this well-known representation. (labeling in the original may differ)

Notes: Corner cases: what are they for?

Note that the “corner cases” are appropriately rare. They correspond to pure plays with few real world examples. Pure cost leaders may exist for some commodities that are totally undifferentiated and with entirely horizontal appeal. Pure vertical plays with no differentiation and no cost advantage correspond to isolated (monopolistic?) situations. Pure differentiation strategies with no cost advantage and no vertical sensitivity at all correspond to those rare killer apps that take the world by storm on the basis of their sole uniqueness and where cost does not matter – because some of them are free (Internet browsers…)!