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The Sustainability of Low-Cost Business es

Are low-cost businesses a permanent, enduring threat? A business that sells at prices dramatically lower than other competitors must go bankrupt

Interestingly, low-cost companies stay ahead of market leaders, if a bu siness gets a customer to buy its products or services on the basis of pr ice, it will lose the customer only if a rival offers a lower price The discounters win all their customers because of the prices they offe r, they dont have to worry about traditional rivals that always charge premiums

The Futility of Price Wars


?: Is our new rival targeting a segment we dont want to serve or will it eat into our sales? Low cost players generate 98% of their bookings through their websites, while only 20% of incumbents customers use the iternet to make reservations. An Internet-based reservation system is inexpensive to develop and maintain when all the aircraft in a fleet are identical, there is only one cabin class, tickets are not refundable, and passengers cant reserve seats. Most incumbents participate in industry-wide reservation systems such as Sabre, which robs them over control of some seats. The traditional airlines have set up networks of travel agents, which would rebel if the carriers made a complete shift to direct bookings.

When Differentiation Works


When businesses finally realize they cant win a price war with low-cost players, they try to differentiate their products in a last-ditch attempt at coexistence. The conditions determine the effectiveness: First, smart businesses dont use these tactics in isolation. (Bang & Olufsen ) Second, companies must be able to persuade consumers to pay for benefits. The ability to do so usually depends on the products they sell.(Gillette) The third condition necessary for a successful differentiation strategy is simple: C ompanies must bring costs and benefits in line before implementing it. (DELL & H P, Britist Airways)

Dealing with Dual Strategies


Large low-price customer segment often makes companies set up low-cost ventures. Companies should set up low-cost operations only if the traditional operation will become more competitive as a result and the new business will derive some advantages that it would not have gained as an independent entity A low-cost operations sources of competitive advantage arent the same as those of the parent, the subsidiary should be housed separately. By setting up an independent unit, an established company can create a start-up operation with structures, systems, staff, and values that are different from its own. Because it is independent, the low-cost operation will be more accountable and is less likely to be smothered.

Switching to Conquer
Switch to Solutio ns:

Offering products an Hard to evaluate the quality of the s olutions, d services as an integ Deep understanding of the customer rated package, comp s business processes costly to cha anies can expand the nge suppliers segment of the mark Low-cost players have limited produ ct ranges and service capabilities, th et that is willing to p ey cannot offer solutions ay more for addition Key successful factors al benefits.
Working with customers to understa nd their problems before designing s olutions. Manage customers processes and in crease their revenues or lower their c osts and risks

Advantages:

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