Many established companies will prefer to deal with competition presentedby business rivals whose operating strategies are familiar to them. However, this preference of fighting off competition from only established competitors, while ignoring the threat from low-cost, un-established competitors spells doom for such businesses.
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Businesses that use the low-cost business modelstake advantage of factors such as globalization, innovative technologies, convenient & strategic locations and deregulation, to offer their products at lower prices. Such entrants have altered the manner in which CEOs are running their businesses, as they try to counter fierce competition from their established counterparts. These factors fortunately have worked out well for them.
Kumar suggests a number of strategies aimed at dealing with low-cost competitors. These includeproduct differentiation and adoption of low-cost strategies in their operations.
Product differentiation is achieved through continuous innovative product designs, offering exclusive product mixes different from that of competitors and selling experiences. Kumar however warns that these strategies should not be applied in seclusion, butrather, integrated with others.
Their success in countering competition lies in their ability to persuade customers to pay a premium for extra benefits offered from the use of their products. Such product differentiation strategies should ensure that there is a balance between costs and desired benefits for any business adopting them.
Adopting a dual strategy in dealing with low-cost competitors is a verychallenging option and few business organizations succeed. Such strategy should be adopted whereit promises desired synergy as a result of adopting it. It also requires businesses to adopt unique brand names that are appealing to their target customers and are able to raise their expectations on the low cost model.
Kumar identifies the reasons as to why a dual strategy may not succeed. They include; common ownership of a low cost business unit.This imposes cost constraints on the low-cost business unit. There is also the challenge of resource allocation between the parent company and its subsidiary. A dual strategy should not be defensive to low-cost competitors’ strategies, but rather offensive to increase revenues and/or lower costs.
Another strategy that organizations can adopt is to sell experiences. This is where organizations sell products and services as a package, and charge a premium. This is beneficial to the incumbent because low-cost entrants have a limited product and service range, and thus may not be able to sell experiences. This strategy succeedsin organizations with a better understanding of their customer needsand can develop solutions that are customized to satisfy such needs.
The final strategy that Kumar recommends is for organizations to adopt low-cost business models. This strategy may not be an attractive course for many incumbent businesses, because their existing business models are still profitable, although their market share and revenues may be shrinking.
Some established businesses believe that low-cost entrants may not be able to sustain themselves, but evidence suggests otherwise. They are able to survive the fierce competition from the established businesses by employing a combination of tactics such as concentrating on a particular consumer segment and adopt very efficient operations.
This enables them to provide their products or services better than their established counterparts. They also promise convenience to customers through their strategic locations. From his research, Kumar suggests that ignoring low-cost competitors will be detrimental to any established business.