Andrew Bass’s Pragmatics Newsletter October 2012
Practical techniques and thought-provoking ideas Main article takes under 4 minutes to read.
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Caught in the Crusher
Remember the scene in Star Wars where the heroes are trying to rescue Princess Leia and end up falling into a waste crusher? A lot of companies are finding themselves in a similar squeeze.
A vivid example in the news at the moment is that of mid-market car manufacturers in Europe. Ford are laying off ‘hundreds’, and GM has closed the Ellesmere Port plant for a week. There is huge over-capacity and tough price competition. But, at the high end, manufacturers like BMW are doing well, as are players at the lower end such as Hyundai and Dacia (because the truth is now that those really are good cars, made by manufacturers who deliver comparable value to a Ford in the eyes of their customers, but working off a lower cost base).
This all fits classic, vanilla-flavoured, strategy – laid out by Michael Porter three decades ago – that everyone learns even in secondary school business courses these days. Businesses can compete successfully either by being the lowest cost (not just low cost, and especially not low price unless you really are lowest cost), or by being differentiated so as to command a premium.
Companies making almost identical cars with average cost bases are caught in the crusher. If your offerings and cost bases are industry-average, and all you can think of is to try to undercut your competition, so are you.
Not convinced? Here’s a logic quiz: how many lowest cost producers can there be in any given industry or sector…?
…and being “the lowest” requires rare and obsessive Michael Leary/Ryanair-style attention to not just input costs but every activity within the business. Without that, allowing yourself to get caught in price-based competition is a recipe for a long walk off a not-quite-so-long cliff.
Anyone can cut costs or lower prices. It seems to be the default response of many managers, and some people even find it exhilarating. Sure, businesses get flabby and self-indulgent in the good times, of course, but if you are still in business in this environment, my bet is that there isn’t much further to cut – your business’s body mass index resembles that of an elite athlete. Going any deeper is going into the muscle.
All this means you almost certainly need to be differentiating more, and to keep doing so more than you’ve ever previously thought. You must command a premium, by constantly offering new reasons for customers to buy from you beyond just price considerations: are you thinking about this enough?
© 2012 Andrew Bass. All Rights Reserved.