Three Solutions, Three Strategies
When consumers choose a product or a service, they consider three variables: the price – and in this case they go for the cheapest option, a specific attribute – and in this case they go for the brand providing a unique feature, or a tailor-made solution – and in this case they go for the company that can propose a unique product. If price, quality, and anti-conformism always matter, consumers eventually always put one of those three variables at the top of their pyramid of priorities when deciding to buy something. Companies then have to make strategic choices whereas to focus on the first, the second, or the third option. Yet, one of them is clearly more advantageous than the two others…
The Illusion of Concentration
Concentration consists in proposing tailor-made solutions or products that are so unique that neither competition nor substitutes can be considered as such. An example was the launching of super computers by Cray Research in the 70’s. Yet, despite specific attributes making the Cray computer unique in itself, competition would once step in and eventually propose similar performances at lower prices, with additional features. Consequently, choosing concentration as a strategy would anyway end up in competing either on prices or on specific differentiation elements. Exit concentration.
The Danger of Price Wars
If concentration is no longer an option, the temptation to compete on prices can be high, especially when the business has a critical size allowing economies of scale and synergies. In this case, the company can easily reduce its costs, thus impacting its price to reach unexpected abysses. This approach through cost domination yet raises important strategic issues, which can eventually prove to be liabilities instead of assets. First of all, the market has to be elastic to price. But since all consumers somehow care about prices, we can reasonably consider that most markets are nowadays elastic to prices, especially after undergoing economic turmoil. So money matters! Secondly, price wars can only be effective for the starter. Whoever comes next will less benefit from it, especially that the proposed price should be below the pioneer’s one. In this case, the risk to reach the break-even point and to perform dumping is high. Anyhow, even for the starter, the income life is short since, in such circumstances, consumers are never loyal to brands: only the cheapest ones win. And this leads to the third point: sustainability. When starting or getting into a price war, businesses not only reduce their profit margin, they also harm their positioning, their value, their quality while reducing the costs, and eventually their brand power. If such a strategy can prove to be attractive on the short run, it is a serious liability on the long one.
So what to do?
If concentration eventually summarises as competing on prices and/or features, and if price wars threaten business sustainability, the only valuable remaining strategy is logically differentiation. The latter not only ensures branding penetration, but also quality, employment, and improvement. Yet, the threat of both concentrated and cost dominant competition is still alive. In order to optimise one’s differentiation strategy, companies should then first optimise their own cost structure.
To do so, after investigating precisely the components of their cost, companies should identify the business environments worldwide where each cost component can be produced at the lowest possible amount, yet ensuring the requested level of quality. Once done, this total cost should be optimised thanks to the value chain. The later determining what contributes the most to the creation of value in the consumer’s mind, the brand could easily decide to delocalise its production where the most important part of its cost is the cheapest. At the end of this journey, the company should reach an asymptotic cost, i.e. lower than any competitor on the market, yet ensuring quality, respecting the brand’s positioning, and keeping the same selling prices, so not following any cost domination strategy.
When dealing with a concentrated company, time and patience would eventually force the latter to either compete through price or through differentiation. And the optimised brand would then easily cope with such a threat. When dealing with a cost dominant company, the optimised brand would keep its positioning and sustain its activity by developing new features, as well as probably also dominate by cost since its optimisation strategy was certainly not equally implemented by a price war freak. Lastly, when dealing with a differentiated company, both would know the danger of price wars, so both would have certainly optimised their costs, not to challenge prices, but to protect themselves from such a war, resulting in an unsaid agreement to only compete on differentiation, i.e. quality, creativity, and marketing decisions.
Differentiation, Only Differentiation, Nothing Else But Differentiation
In a globalised world where competition is fierce, especially from emerging countries such as the BRICS, where labour costs are so low and technology transfers are so common, companies can no longer expect sustaining their activity on the basis that they produce something that no one else produces, or that they can decrease their prices to thresholds that no one will be able to cope with. Indeed, the only serious strategic option any company should follow is to keep understanding what consumers need in order to provide them with creative solutions while, in the meantime, keep optimising its costs and quality through international investigations and deals.