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Competing with a Low Cost Competitor

By M. Dana Baldwin, Senior Consultant

Note: This article was previously published in Compass Points in June 2007

Strategic Planning Expert

Strategic Planning Expert

Earlier, we discussed one way to compete with a lower cost, lower price competitor: differentiation — defined as finding a significant point of difference, which will allow you an ongoing competitive advantage. However, sometimes differentiation is not enough. Just ask the airlines how well it has worked.

For example, some companies tried attacking a low price competitor by forming low price subsidiaries. In order to have this work well, there are some basic principles which should be followed.

First: a company must recognize that this strategy will be successful only if the original company will become more competitive as a result of setting up the low cost subsidiary. Many airlines tried this approach, but failed because they did not successfully separate the subsidiary from the parent.

Second: The lower cost subsidiaries should be segregated from the higher priced parent to reinforce the differences. United serviced the United Shuttle and later, Ted, with the same ground and reservations staff, and their high costs, which really prevented either from being successful.

Third: The subsidiaries must be launched with a realistic expectation that they are really in business to make a profit. If they are simply there to occupy the space opposite a low cost competitor, and are not intended to make profits, it is highly likely they won’t.

Fourth: The subsidiary should be very limited in what it is intended to do. Focus on the specific needs of the market and limit what the subsidiary will do to only what is necessary to make it profitable. The subsidiaries’ resources should be optimized for its own operation, and not be the same as the parent’s.

The subsidiary should be able to compete in the market with its parent as well as the other suppliers. Potential synergy in the combined strategies of parent and subsidiary is the positioning of the sub can help customers realize the added value of the parent’s products and services.

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M. Dana Baldwin is a Senior Consultant with Center for Simplified Strategic Planning, Inc. He can be reached by email at: baldwin@cssp.com

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