You are a company whose products and brands are premium.

When low-cost competitors appear (or you first truly become aware of them), how should you respond? Should you ignore them and continue focusing on the premium segments, or should you revise your strategy and tactics to directly confront the low-cost threat. Whatever the best response may be, established companies often understimate the challenge, according to Adrian Ryans. They may not even be adequately aware of the threat because they are too focused on their traditional competitors, or they have become complacent or arrogant. Ryans, an IMD professor of marketing and strategy, draws on his book Beating Low-Cost Competition: How Premium Brands Can Respond to Cut-Price Rivals, to explain three ways in which low-cost challengers become dangerous and what you can do about them. One way in which low-cost competitors can catch you unaware is by taking time to build momentum by competing in undeveloped segments of a market. They can be growing without having a large effect on sales of incumbents, especially if the overall market is growing. Incumbents may continue to enjoy a false sense of security even as lost-cost competitors grow, drive down prices, and perhaps alter consumer behavior. Ryans illustrates this with the cast of low-cost airlines. A second way low-cost competitors may establish themselves is by overcoming capability gaps. They copy the look, feel, promotional materials, and suppliers of premium players. Customers wanting more competition among suppliers can assist this process, while suppliers of parts may be happy to sell to low-cost competitors. Suppliers may even transfer knowledge and experience from their premium customers to the low-cost entrants. Low-cost entrants can also have unintended second-level effects that imcumbents fail to notice before losing significant market share. For instance, low-cost companies that havent flourished through that strategy may differentiate their products and move up-market. Since they started out developing a low-cost base, they can then become a major threat to preexisting premium companies. Ryans briefly outlines a few options premium-brand companies can choose from to respond to their competitive threats. Incumbents might, for example, directly confront a cost competitor by launching competitively priced products to adjusting strategy in an attempt to isolate the business from the low-cost threat. Premium players can sometimes protect their position by providing complete solutions.

continuing the conversationAuthors response to reader comments

In September 2010, the author reviewed our readers comments on his original article and weighed in on the conversation with new insights and reactions to readers arguments. In the dozens of responses to my recent article, readers provided numerous examples of the challenges low-cost rivals are creating for premium players in industries as diverse as California premium wines, flavors and fragrances, IT services, open-source software, and pharmaceuticals. The challenge is certainly a real one, and readers had many interesting observations on its nature and on how companies should respond to it. Multiple readers called attention to the difference between low-cost and low-price competitors. Factually, they are clearly correct. The article discusses low-price competition, but that isnt a sustainable strategy without correspondingly low costs. In any case, the accepted terminology among practicing managers is low-cost competition. A few purist

academics may object to using that term, but managers dontit is never an issue when I teach or give presentations. Premium companies may very well have low production costs, but their full costs, with all complexity and overheads, are rarely as low as those of a lowcost player, even though they may have greater scale. Several readers notedand I agreethat the path forward for these premium players is clear in principle: such companies must connect or reconnect with customers and potential customers and develop a deeper understanding of their needs, of what they are willing to pay for, and of what competitors offer. In some markets, companies still have opportunities for innovation in one or more dimensions of product performance. Yet customers particularly business-to-business (B2B) customersincreasingly demand hard evidence that the premium players higher-performance offerings will have a positive impact on the bottom line. SKF, a leading global player of bearings and related products and services, is responding to this need in some of its markets by providing a hard estimate of the return on investment (ROI) customers will get by investing in the SKF solution. The estimates are based on hundreds of documented client case studies in which end-user investments and benefits have been identified, quantified, measured, and tracked. In some cases, part of the ROI may be guaranteed. In many markets, the true innovation opportunities entail creating greater relational value tailored, complete solutions that involve much more than a core product or service. For a company that has historically succeeded by developing a higher-performance product, the transformation into an organization providing tailored solutions can take years, since that often requires significant cultural and mind-set changes. Indeed several readers noted in different contexts that successfully recognizing and responding to low-cost competition requires such changes. The response begins with recognizing that good enough products and services meet the needs of some real customers and that if companies cantor wontrespond to these needs, other competitors will. Competing successfully in the good-enough segments of a market (as well as holding on to premium customers) may require very different business systems, not just different products or services. Nestl, for example, has in recent years focused more resources on popularly positioned products for emerging consumers, who are often located in rural areas of developing markets. Many products must be offered in single-serving packages and reformulated to help address the micronutrient deficiencies of these consumers. In addition, prices must often stay low to match the number of coins in their pocketsa real challenge when many ingredients have volatile prices. In some cases, Nestl must reconfigure its supply chain and develop new routes to market. The company has over 200 microdistributors and more than 7,500 door-to-door salespersons in Brazil alone, for example, as well as a floating Nestl supermarket to reach remote communities on the Amazon. The battle for market share in popularly positioned products clearly demands a mind-set totally different from that required for the category management of mainstream products sold in the modern trade in big cities. In 2010,

popularly positioned products have been a $9 billion business for Nestland growing at a double-digit rate. New, innovative routes to market, such as those employed by Nestl for its popularly positioned products, are often a key element in these business systems, both in business-toconsumer (B2C) and B2B markets. Developing and implementing the new strategies is a huge challenge for any management team. Yet before they can be formulated, the team must work hard to detect changes in customer needs and behaviorwhich, as many readers point out, is a task some premium-brand incumbents have failed at time and time again. To better monitor and respond to local opportunities and threats, some readers argued, global players must give much more autonomy to country or regional management teams. The danger of moving too far in that direction, however, is that a fragmented series of local responses can miss opportunities across markets and the potential for global players to gain scale and cost advantages by responding in a more coordinated way. A medical-products company, for example, could end up with diagnostic-imaging equipment designed to meet the needs of the good-enough local markets in Africa, Central and South America, China, and India but miss the opportunity for a slightly less tailored solution that meets much broader needs across the developing and developed worlds. Readers rightly argued that the trend to good-enough offerings may accelerate in many industries as a result of three factors: core product technology can be bought or licensed from third parties, open-source platforms lower costs and entry times for new low-cost competitors, and the sharing of experiences between users and potential users on the Internet can accelerate the adoption of good-enough products and services. In addition, the sophisticated third-party manufacturing and infrastructure players available in many industries allow new low-cost entrants to launch and ramp up their products and services rapidly. For instance, Vizio, which in less than five years became the largest seller of LCD TVs in the United States, benefited greatly from its close relationship with AmTran Technology, a Taiwanese contract manufacturer. Acquiring a low-cost competitor, readers suggested, is one way to access the opportunities in the good-enough market space and to put pressure on low-cost challengers. But the better low-cost players, seeing tremendous growth opportunities, are expensive to buy. Besides, when they are acquired by multinationals, many of them soon become higher-cost players as their occupational health and safety provisions, IT systems, and employment conditions move closer to developed-world standards. One promising approach, adopted by Cemex in developing markets, is setting up relatively low-cost franchised distribution networks that allow these companies to reach smaller urban and rural markets and sell cement and related products to small contractors and people who do their own construction.