Analyzing the Competition Is Hard

Competition is hard to understand because nobody knows what their competitors are thinking. Competitors usually send signals into the market to mislead their peers. Samsung recently announced that they’re looking to make a $17 billion investment in chip fabrication in the United States. Clearly, Samsung is sending a message to competitors, saying, “We’ve got a $17 billion foundry coming online, so you need to decide: Do you feel confident enough that if you make a similar investment that floods the market with chips, a) it’s not going to lead to a decrease in price, b) maybe it will cause competitors to leave us Samsung and go to you, or c) the market’s big enough to handle all of the supply coming online?” That’s a pure competitive strategy. It doesn’t get more challenging than that.

Let’s assume you’re a rice company operating in the premium segment and you’ve exited the low-cost segment. But you noticed over the years a lot of new players have entered the low-cost segment, and a few have decided to consolidate the sector. Over the last few years, you’ve also noticed that the market shares have remained largely static in the value segment. But the overall market in the value segment is growing so that these low-cost players are generating a lot of cash. They are low cost, they have lean operations, the margins are not high, but given the volumes they have, it’s fairly significant.

Here’s the challenge. As a premium player, you have to decide if you want to defend your space. Option one is saying, “I think the value players at some stage are going to see the margins in the premium space, and they’re going to come for it with a new brand. We have to brace ourselves for this and prepare for an attack.” Option two is to do nothing, thinking, “Nothing’s going to happen. We’ll just do what we’ve always done, and everyone’s going to be happy.” Option three is saying, “The fight is going to come our way, so do we fight on our turf, which is to wait for them to enter premium? Or do we take the fight to them and enter the market with a value product in the value segment of the rice market to compete against them?”

That’s a difficult decision to make, but here’s the insight. When companies do this, most of them fail. We’ve seen this in the airline industry for many years. National carriers—carriers that were mandated by the government to provide aviation services—generally have bloated infrastructures that are semi- or state-owned, and they’re not cost efficient. So they have launched a low-cost competitor to compete against other privately owned low-cost players. The rationale is simple. They say, “Low-cost players are making tons of money, and they’re going to attack us on our long-haul routes at some point. So let’s create a low-cost player to take them on.” But they fail. Why? What’s the insight?

Building a low-cost company or a low-cost brand on the infrastructure of a high-cost brand means the low-cost brand is going to be a façade. It may get some things right from the low-cost brand, but the culture, thinking, sourcing, procurement, staffing and organizational structure are a legacy of the high-cost brand. And unless there is complete separation, at least you have management that can force a clean separation and protect the integrity of the low-cost brand, the low-cost player ultimately fails.

But there’s a deeper insight here. If you are a high-cost player, one option is to enter the low-cost space with the goal of making it more premium. You educate the consumer and make them more willing to pay for a more expensive version of the value brand. You’re basically educating consumers to not buy the cheap product. We’ve seen this extensively, and a great example of this is the rise of organic products. Costco does this very successfully. They entered the organic space and started introducing organic products into the low-cost space, but those organic products are slightly more expensive than the low-cost products. They’re educating consumers to think, “My health matters to me, so I’m going to pay a little more.”

It’s difficult to change who you are and launch a low-cost or high-cost product, but you can take what makes you good, educate consumers and thereby raise the value of a low-cost category. The alternative also works. If you’re a low-cost player, you can enter a high-cost category and show consumers that they’re overspending and give them what they want at a slightly lower discount. As a brand, your overall margins increase, but you’re stealing share from other players. That’s been a very successful strategy for automotive companies.

FIRMSconsulting Insiders can use Competitive Strategy with Kevin P. Coyne to dive into some of the leading thinking on Competitive Strategy.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #13.