Posts Tagged ‘cost leadership’

Strategic Positioning at Wal-Mart

September 4th, 2010 Comments off

I’ve had the link to this article in my Inbox for over a month now, but the timing couldn’t be better for posting it now in terms of what we are discussing in class.  I even mentioned Wal-Mart and failed fashion strategy recently in class, probably because my memory had been triggered by seeing this recent article.

Over the past decade, Wal-Mart has veered from one approach to clothing to another. The discount giant has even tried to emulate rival Target Corp. by stocking its own lines of trendy outfits. At other times the Bentonville, Ark., retailer has placed its bets on bulk packs of everyday wear, like tube socks and T-shirts.

“Wal-Mart has suffered from not knowing who they want to be,” said Allen Questrom, the former chief executive of J.C. Penney Co. who recently left Wal-Mart’s board. “They’re either trying to be too fashionable or too basic.”

As mentioned above, not following a consistent path can be dangerous when it comes to being competitive.  The article goes on to say that Wal-Mart has to stick with a plan, but that plan should be differentiated to avoid the danger of being seen as a pure cost leader when it comes to fashion.

But sticking to just the most humdrum clothing is a risk for Wal-Mart, too, as it carries lower margins than more fashionable apparel and isn’t as much of a traffic driver or an impulse buy. That is something Wal-Mart could use, as its sales at stores open more than a year have fallen for the last four quarters.

“They need to be dominant in basics like jeans,” said Mr. Questrom, “but they have to be fashionable jeans.”

A Fashion Identity Crisis at Wal-Mart — Newly Installed Apparel Chief Needs to Strike Balance Between Boring Basics and ‘Chasing Glitter’. Ann Zimmerman. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 29, 2010. pg. B.1

Nobody Prices Better Than Airlines

August 27th, 2010 Comments off

One of the first things frequent fliers learn is that the number of fares paid by each person a plane is nearly equal to the number of passengers.  Airlines aggressively price routes to try to maximize usage of capacity while also maximizing profits.  The end result is that airlines can and do change prices multiple times a day as they jockey themselves amid a sea of competitors to sell what has largely become a commodity, at least in the eyes of leisure travelers.  Simply put, too many people have grown accustomed to searching for flights based on price (because nearly every online search defaults to sorting with the lowest priced flights first) that airlines were unable to differentiate themselves effectively from competitors because when their fares were on screen 2 or 3 of the search they never got booked.

Realizing this (and realizing that not every company can compete solely on cost/price) we’ve seen the “unbundling” of items that used to be included in airfares.  Everything from checked-baggage fees to higher penalties for changing flights (and even carry-on baggage fees at Spirit Airlines) is now seen as a way to charge customers which, in turn, makes it hard for airline passengers to compare two prices because one needs to know all the fees that each airline can assess to make a valid comparison.

The Wall Street Journal today took a look at airline pricing (more from a consumer’s point-of-view than a scientific one as this appeared in the Personal Journal section) and asked some questions about why it is sometimes cheaper to fly overseas than to fly a few hundred miles.  The short answer? Because people are willing to pay more to fly to certain places and/or the competition is not as rigorous on certain (especially international) routes.

The price you pay for a ticket is driven by a number of variables: competition, types of passengers, the route and operating costs. But the biggest factor, by far, is whether discount airlines fly in a market. Low-cost carriers often set the price in markets because competitors feel compelled to match that price or risk losing customers and flying empty seats. And when they aren’t there, big airlines behave radically differently when setting prices.

Over a year ago when Southwest began serving MSP, I offered my own examples coupled with a Marketwatch article of the wide disparity in fares on routes where discount carriers are strong vs. those where they are absent.  The Wall Street Journal piece largely comes to the same conclusion.

And when there’s not low-fare competition, prices soar. The most-expensive average domestic ticket in the first quarter was $786 for round-trip flights between San Francisco and Philadelphia, according to the DOT. That 2,521-mile route is dominated by United and US Airways, who are competitors but also partners in the Star Alliance. Fly to Boston from San Francisco—183 miles farther by air than Philadelphia—and you paid an average $296 less round-trip in the first quarter, according to DOT. The difference: JetBlue Airways has 17% of the San Francisco-Boston market, but none of the San Francisco-Philadelphia market.

As you will discover in this course (and in life) the cost of something often has little to do with the price that is charged.  Does it really cost 100 times more to make a Coach bag that sells for $4,000 as it does to make the one at Target that goes for $40?  Of course not…yet many still fall into this trap with regard to their expectations about prices.

The Middle Seat: You Paid What for That Flight? — It Can Cost More to Fly to Hartford Than Barcelona; How Airlines Determine Ticket Prices. Scott McCartney. Wall Street Journal. (Eastern edition). New York, N.Y.: Aug 26, 2010. pg. D.1

“Performance Pricing” Strategy to Avoid Cost Leader Pitfalls

May 27th, 2010 Comments off

As we discuss in class when contrasting cost leadership vs. product differentiation strategies, the cost leader is in a dangerous position.  All it takes to knock of a cost leader is for someone to be even cheaper…not that cost leaders can’t be successful (Costco, Walmart, etc.) but the majority of firms need to offer value that they can charge a fair price for without racing to the bottom to be the cheapest provider.

This article is for everybody else: those who choose not to compete on the basis of cost and low price. This article is for companies that can and should compete on the basis of performance, for which their customers willingly pay higher prices.

By competing on performance instead of price, you shift the battle to where your company’s strengths lie—in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers’ needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits.

The Wall Street Journal on Monday had a feature section that contained many good articles related to management theory but the quote above came from a piece that suggested that more companies need to find their strengths, match those strengths to needs in the marketplace, and price their products/services accordingly (i.e. higher) to maximize profits.  There is an element of Value Chain cooperation at the end of the article as well.  Typically the way prices have been set has been a closely guarded secret but there are times when cooperating with customers and/or suppliers can result in two companies doing things together to lower costs, for example, that they would have been unable to do on their own.  This creates value for both participants and can tie together companies to work together in the future.

WSJ Executive Adviser (A Special Report): Pricing — Raise Your Prices! Face it: Most companies can’t compete on price; And the good news is they don’t have to. Frank V. Cespedes, Elliot B. Ross, Benson P. Shapiro. Wall Street Journal. (Eastern edition). New York, N.Y.: May 24, 2010. pg. R.8

Nintendo Posts Full-Year Profit Drop –

May 18th, 2010 Comments off

Here’s an article about a product that nearly everyone has been exposed to: videogame systems.  Nintendo’s Wii console and DS portable platform have enjoyed many years of success but as competitors retool their own products Nintendo will find it increasingly difficult to remain the dominant seller.

Battered by slowing sales of its Wii game console and DS handheld videogame player, Nintendo Co. posted lower annual profit for the first time in six years and said it expects profit and salesto fall again this fiscal year as it plots new products to revive growth.

Already they have had to slash prices which is an indication that their products are becoming less differentiated that they have been and, like cellphones, the nature of the market is such that dominant players tend to get knocked off their perch in favor of more nimble, risk-taking competitors that come up with new ideas while the industry leaders rely on past successes.  The scenario Nintendo is facing fits nicely in the cost-leadership vs. product differentiation discussion because here we see a company that risks losing their market position if they get “stuck in the middle” as Circuit City did a couple years ago.

Another minor issue mentioned in the article is the exposure Nintendo has to foreign currency exchange rates.  We’ll get into multinational considerations later in the semester but it is important to recognize this risk as being a big factor in the performance of companies with foreign operations.

Nintendo, which earns more than 80% of its revenue outside of Japan, said it expects an exchange rate of 95 yen to the dollar and 120 yen to the euro this fiscal year.

Nintendo’s Profit Drops as Rivals Move In — Wii Maker Plans New Products but Expects Earnings to Drop Further Amid Increased Competition for Videogame Dollars. Daisuke Wakabayashi. Wall Street Journal. (Eastern edition). New York, N.Y.: May 7, 2010. pg. B.5

When a Cost Leader Gets Squeezed

January 21st, 2010 Comments off

There was a story in today’s paper that caught my eye about the recent price cuts on mobile data/voice plans announced by AT&T and Verizon Wireless and the potential impact of these cuts on Sprint, a company that has been positioning itself as a cost leader.  As we discussed in class, a cost leader can only hold that position until someone else comes along and offers a lower price.  That hasn’t happened yet, but there is an argument that even though AT&T and Verizon Wireless are pricing their packages higher that Sprint still could be threatened.  It will ge interesting to watch Sprint’s response and how this plays out between the two market leaders and Sprint.  Stay tuned.

Sprint Squeezed by Rival Price Cuts — Carrier’s Lower-Price Lure May Be Undercut by Reductions at AT&T, Verizon. Niraj Sheth. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 21, 2010. pg. B.8

Corporate News: Verizon, AT&T Escalate Pricing War — Carriers Race to Drop Calling-Plan Prices, But Require More Customers to Pay for Data Services. Niraj Sheth. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 16, 2010. pg. B.5

Airline-Sector Woes Slam India’s Highflier

July 4th, 2009 Comments off

Another airline story from Asia, this time about Jet Airways from India.  Until a couple years ago, Jet seemed unstoppable.  They modernized air travel in India and enjoyed market share of nearly 50% in 2003, but it has since fallen to less than half that.  Uncontrolled costs and external factors have taken their toll and this article sums up a lot of things we have talked about in class including cost control, fixed vs. variable costs, quality/cost/time issues, competition, compensation and staffing issues, etc.

Airline Sector’s Woes Slam a Highflier. Daniel Michaels. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 2, 2009. pg. A.1

Starbucks vs. McDonald’s

May 14th, 2009 Comments off

Starbucks, in an effort to weather the prolonged economic downturn, is seeking to now appeal to cost-conscious consumers.  I’m not sure that the back-and-forth between being a high-end “experience” vs. a low-cost cup of joe is going to really do them any good.  It seems like it might just confuse customers and they may lose the high-end folks and fail to convince others that their prices are low.

The Seattle-based company is training its baristas to tell customers that the average price of a Starbucks beverage is less than $3, and that 90% of Starbucks drinks cost under $4.

Corporate News: Starbucks Plays Common Joe — Coffee Empire Seeks to Seem Less Expensive in Recession. Janet Adamy. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 9, 2009. pg. B.3

The article above was from February.  More recently things have heated up in the “coffee wars” with McDonald’s seeking to strike when the poor economy favors a cost leadership strategy even more than when times are good.

Corporate News: As Profit Cools, Starbucks Plans Price Campaign. Julie Jargon. Wall Street Journal. (Eastern edition). New York, N.Y.: Apr 30, 2009. pg. B.3

Starbucks Ads Urge Consumers Not to Switch to Cheaper Coffee.  Julie Jargon.  May 1, 2009

Corporate News: New Ads Will Stir Up Coffee Wars — As Starbucks Touts ‘Perfect’ Cup, McDonald’s Promises an Affordable Lift. Julie Jargon. Wall Street Journal. (Eastern edition). New York, N.Y.: May 4, 2009. pg. B.7

In short, it is very interesting to see two powerhouse companies tweak their market position to try to capture market share and profits.  I think Starbucks has the most to lose here because just two years ago (as evidenced by some other articles I posted from 2007) they were seeking to reconnect with consumers that don’t just want coffee, but that want an “experience” with their coffee.

This recent goal of competing on price and what appears to be “coming down to the level” of McDonald’s may harm the earlier strategy.  It may work in the short term when the economy is in rough shape, but long-term the premium customers may go elsewhere.  Although where they would go remains a mystery since Dunkin Donuts is the other big player in the coffee market and they compete on price as well.  It should be interesting to watch how this plays out.