The counter-offensive against low-cost and disruptive competitors

Citation

Gorrell, C. (2008), "The counter-offensive against low-cost and disruptive competitors", Strategy & Leadership, Vol. 36 No. 1. https://doi.org/10.1108/sl.2008.26136aae.002

The counter-offensive against low-cost and disruptive competitors

The counter-offensive against low-cost and disruptive competitors

Catherine GorrellPresident of Formac, Inc., a Dallas-based strategy consulting organization (mcgorrell@sbcglobal.net), and a contributing editor of Strategy & Leadership.

These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership

Hitting back: strategic responses to low-cost rivalsJim Morehouse, Bob O’Meara, Christian Hagen and Todd Huseby

No company is safe from low-cost rivals. Almost overnight, nimble low-cost competitors can exploit their offshore advantage, partnerships, and inexpensive technologies to break down barriers and rewrite the rules of competition.

The true danger

Successful low-cost competitors don’t just sap margins incrementally. What makes them so dangerous is their ability to redefine the entire competitive landscape. The low-cost competitor transforms its value chain to reduce prices drastically. With low costs as a pivot, it shifts the ground beneath larger, less flexible opponents and turns their mass and momentum against them. The responses of the larger firms often come too late to be effective, and are hampered by strategic assumptions that no longer apply. The larger rivals soon find they are fighting a war on the new competitor’s terms. Wanting to move quickly, they often cut back on prices to retain customers. If they do so before performing a thoughtful analysis, this action may punish them further.

How to prepare

The way to beat low-cost competitors that have the potential to become serious competitors is to identify and deal with them early, before they get a foothold in a market.

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  Low-cost competitors can be right under your nose. A current partner, a supplier or even a contract manufacturer can walk away with key elements of your value chain, establishing its own operations on a modest scale and positioning itself to take more value later by moving upstream or increasing its leverage.

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  Many companies fail to recognize the significance of a low-cost competitor until it’s too late because they craft strategies in functional silos, according to internal objectives, without considering the entire spectrum of competitor strategies or changes to the external environment.

The best way to identify and thwart a low-cost rival is to adopt its mindset, anticipate its next competitive move and measure your costs against its costs.

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  This best practice analysis requires four steps.

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  Seven clues to identify rivals are offered.

What to do when the battle starts

“What to do” to defeat low-cost competitors involves two separate but related tasks: First, “stop the bleeding”, and second, reposition the company for success in the new market. Break down potential moves into short-term tactics and long-term strategies. The article tells how to identify the genuine threats, take on the serious competition, adapt to its tactics quickly and hit back with a well-placed blow.

A key part of a battle plan is establishing “what not to do” when fighting low-cost competition: six excellent points are cited.

Taiwan’s bicycle industry A-Team battles Chinese competition with innovation and cooperationJonathan Brookfield, Ren-Jye Liu and John Paul MacDuffie

Taiwan’s bicycle industry has persevered against increasingly severe competitive challenges by Chinese companies. In recent years the industry has developed innovative, high value-added products and transformed the organization of production in Taiwan through a new version of cooperative competition. It presents an interesting case of how established producers may counter-attack when faced with low cost competitors.

Case study

While Taiwan’s traditional networks have honed the competitiveness of its bicycle industry, it may also be a very cruel reality that supplier networks in China, some owned by Taiwanese, have also begun to adopt many of the same principles and tactics.

If Taiwanese manufacturing is to avoid decline, something is going to have to change, and a new model of supplier relations may be needed to support the development of Taiwanese manufacturing going forward. Incorporating characteristics of an integrated, co-innovative supplier network, Taiwan’s bicycle industry created an A-Team that is a new cooperative network.

Broadly speaking, integrated, co-innovative supplier networks have two basic features that differentiate them from traditional modular, symbiotic supplier networks.

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  First, whereas traditional supplier systems have emphasized cost control, integrated, co-innovative supplier networks appear to be more focused on value creation through co-innovation.

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  Second, by adopting a more integrated network structure, such supplier networks appear to have a greater ability to resist imitation.

Based on Taiwan’s bicycle industry, there seem to be five basic conditions for establishing a successful integrated, co-innovative supplier network. There must be: (1) a strong awareness of industry risks and/or prospects, (2) trust among network members, (3) long-term interactive cooperative relationships, (4) a desire to learn, and (5) extensive communication, including substantial face-to-face communication.

For producers faced with the challenge of coping with the threat of low-cost competition, co-innovation within an integrated supplier network may be quite helpful. By working to coordinate the innovation efforts of assemblers and suppliers and also effectively implement relevant aspects of other best practice manufacturing systems, such as Toyota’s, Taiwan’s bicycle industry A-team has laid a good foundation.

A plan for a US newspaper industry counterattack against disruptive innovatorsJohn Sterling

The transformation taking place in the newspaper industry is a text book example of disruptive innovation. At stake is not only the survival of individual businesses, but of an open society. An open society needs news organizations to responsibly gather and process primary-sourced news and information. If newspapers cannot transform themselves and thrive, who will do that with consistency and trust? Hence, this battle is important to readers as an informative case study for their own industry (if and when it is beset by disruptive innovation), but also as participants in an evolving society filled with change and fragmentation.

The American Press Institute (API) recognized that the transformation taking place in the newspaper industry required a collective response, and worked with Clayton Christensen, and his colleagues, to develop a program customized to the issues and changes facing newspaper companies. The program follows the prescriptions that Christensen and Michael Raynor proposed in their book The Innovator’s Solution.

Framing the situation

1. 1.

   Incumbents nearly always have a significant advantage because they have the resources to make substantial investments in sustaining innovation. This is a blessing and curse because, with those resources, they do too much for their customer: extra sections, features, links, etc.

2. 2.

   Disruptive innovators capitalize on this over-improvement carving out limited (often low-cost) solutions that are “good enough” to get the job done for the average consumer. Craigslist.com (goods and services ads), Monster.com (recruitment ads), and Realtor.com (real estate ads) are three examples of competitors cutting into the highly profitable classified advertising revenue.

3. 3.

   Fours steps are to be followed in the recommended counter attach methodology.

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     Step 1. Focus on non-readers and non-advertisers and determine what information-driven jobs they need to have done.

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     Step 2. Develop potential solutions to the identified needs – that is, the “jobs to be done.”

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     Steps 3 and 4. Assess the potential solutions and do real-world testing: invest a little, learn a lot; fail fast and cheap; “be patient for growth, but impatient for profits.” Each of these is a radical change from current newspaper business approaches.

Bottom-line solution

For the newspaper industry there is a radical lesson: serving non-readers will require newspapers to build audiences by fulfilling their “jobs to be done,” a business that goes beyond the core function of reporting the news.

Furthermore, to get to this end point, there are major structural challenges and capability limitations at most newspaper organizations that will need to be overcome for disruptive innovation to become a strategic driver for their futures.

Interview with growth consultant Chris Zook: a less risky path to business model innovationAlistair Davidson and Brian Leavy

Creating a fundamentally different business in the shadow of the old one – while its assembly lines continue to roll – is the daunting challenge Chris Zook addresses in Unstoppable the latest book in a trilogy that started with Profit from the Core (2001) and Beyond the Core (2004). Zook, head of Bain & Company’s Global Strategy Practice offers managers step-by-step advice on how to make “fundamental change in your business model, while still running your business.”

Like the other two books, Unstoppable draws on the findings of the Bain Growth Project, a long-running research effort Zook leads that is aimed at uncovering the keys to sustained and profitable growth. Taken together, the books offer three valuable and related insights. The first book warns that too many firms tend to underestimate the growth potential that remains in their core business and seek to diversify prematurely (Profit from the Core). The second book maintains that the key to successfully expanding beyond the core is to move into carefully selected adjacent activities using a repeatable formula based on clear leadership economics (Beyond the Core). The third book explains how to take the most likely path to success by identifying and exploiting the hidden assets already at hand within the company or easily accessible to it (Unstoppable).

The thesis uniting the three books is that companies need to master all phases of a strategic life cycle: from extracting the full potential from their core business, to expanding their business successfully, to redefining themselves. For most companies and in more industries, the strategy cycle – from Focus, to Expand, to Redefine – has gotten shorter in recent years, and therefore companies frequently confront moments of redefinition of their core. This plus more strategic choices result in more temptations to lose focus on your core before you have reached its full potential. Prematurely abandoning your core is one of the greatest mistakes in business. In practical terms, each number of steps from the core you take, in terms of economic distance, reduces the odds of success. Bain’s research shows a success rate of just under 40 percent for one-step moves declining precipitously to less than 10 percent at three steps from the core. Knowing the details of the economics of how profits are made in a change along any of the dimensions of distance gives businesses practical insights in whether and how to invest.

The leader’s dilemma agendaAlex Lowy

The best leaders are remembered for how they articulated a crucial issue that contained trade-offs and risk and then blazed a new path for their group or organization. This is the “art” of dilemma management: the ability to address the shifting needs, drivers and opportunities occurring around the business, and then actively working to understand, defend and capitalize on them.

Every leader needs to have a dilemma agenda. The agenda should include two categories of leadership dilemmas: direction-setting and culture-setting. The direction-setting agenda defines what is of competitive strategic importance (such as, diversify or grow) while the culture-setting agenda focuses on the values, mood and energy of the enterprise (such as, emphasize a task or relationship focus).

Dilemma framing

To successfully handle dilemmas, start by redefining what you mean by success itself. In place of “win”, think “understanding,” instead of “profit” think “sustainability”… and so on. And leave the dilemma unresolved. This promotes a positive cycle. The payoff for exploring opposing sides of an issue is a more complete understanding of what is going on and the ability to transcend disabling impasses that are fueled by fear and ignorance.

Dilemma sequence

Step 1: Map the symptoms in two stages

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  Listen – capturing symptoms in simple dialogue and naturalistic observation.

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  Identify patterns – finding the themes and fine-tuning the list of major issues.

Step 2: Identify the core dilemma

At the center of every hard to resolve and complex predicament, there is a core dilemma. It will consist of two essential and interdependent factors that together capture the essence of the situation: examples are, profit vs. growth, business interests vs. environmental protection.

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  Generate trial dilemmas to surface as many aspects of the dilemma as possible.

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  Synthesize the one central conflict that best defines the situation. This stage of the process consists of three steps: naming, testing and scenario development.

Step 3: Analyze and reframe using the eight archetypal dilemmas

When facing a dilemma, it helps to step back and consider what is going on from multiple perspectives, not just the one you’ve settled on. Applying archetypes is the easiest and fastest way for managers to gain a new perspective and to jump to new levels of understanding. Eight are offered, with example analysis.

Step 4: Resolve gaps

Achieving tangible results requires action as well as awareness. Recognize and remove the gaps and barriers impeding progress. It’s helpful to organize the gaps into two general buckets: social (mindsets, people and politics) and technical (competencies, processes and technology).

Step 5: Plan and implement

Leadership – in the form of courage, vision and example – is required to overcome organizational resistance and fear: identify and mobilize pockets of support, remind people about the long-term value of their effort, stay open and responsive to feedback, and communicate actively on plans.

Collaborative innovation throughout the extended enterpriseLawrence Owen, Charles Goldwasser, Kristi Choate and Amy Blitz

To innovate, many high performing firms are collaborating beyond their organizations – with their extended networks of suppliers, customers, business partners and others. Such collaboration, however, is not easily accomplished. IBM Consulting offers a framework for managing these alliances– their ABCs of collaborative innovation – that can improve the chances of success.

ABCs

Alignment, boundaries and commitment are the ABCs. Alignment entails synchronizing the strategic vision and innovation goals with the implementation of these throughout the organization, focusing on collaboration both vertically and horizontally. Managing boundaries enables collaboration across organizations, establishing structures and processes regarding governance, operations and technology. Finally, an ongoing commitment is required to orchestrate and systematize collaboration for innovation throughout the organization and its extended enterprise over time.

Pinpointing your collaboration strengths and shortfalls

As a vital part of an overall business strategy, recognize the need to make organizational changes to support collaborative innovation and derive profit from valuable ideas, no matter where they originate. The ABCs – alignment, boundaries and commitment – provide a framework for unlocking the power of many, enabling collaborative innovation throughout the extended enterprise and improving performance. To begin an analysis of your own company’s collaboration capabilities, ask yourself the key questions (offered in article) based on the ABC framework. Your answers can help identify the areas where your organization is already doing well and those that need improvement.

Case studies offered

Eli Lilly and Company helped set the standards in its industry for collaborative innovation. Lilly developed what it called a “research without walls” approach; today over 100 R&D partnerships are handled. The company has launched numerous new products, invigorated its innovation pipeline and achieved revenue growth as well as solid branding as a partner of choice. A sampling of partnerships and the revenues they have generated in 2006 are cited.

Airbus, maker of the world’s largest passenger plane, collaborates with suppliers to accelerate innovation on A380 wings. Amid many challenges, an area of success has been in the wing assembly, one of the most complex parts of the aircraft.