By Robert W. Bradford, President & CEO
Over the years, I’ve encountered dozens of companies that seem to be caught in a trap of their own making. It’s the result of doing whatever it takes to satisfy customers that, in the end, will buy from the supplier who offers the lowest price.
The low-price strategy is a viable one – just look at companies like Southwest Airlines and Walmart, and you can see it can work. But every successful commodity supplier stays true to one key rule: you have to be willing to take value off the table to keep costs as low as possible. You also have to – and this is mandatory – be the biggest player in your market. If you aren’t, you’ll end up losing to someone with greater economies of scale. The successful players who use this strategy all demonstrate both of these principles.
This is a trap for most companies. There are two key problems inherent in the commodity strategy (that is, the strategy of targeting customers who choose based on price alone). The first is that there is only one winner in any market. You can have multiple winners in a market selling on the basis of quality, technology or convenience, for example. But there is only one lowest price supplier, and that one gets all of the commodity customers. Number two inevitably ends up in serious trouble – and if the two players are neck and neck on costs, both number one and number two can end up going under.
The second key problem is that low-cost/price strategy leads to operating in a very specific way. Southwest Airlines has forgone many of the elements of running a mainstream airline, and has tailored their aircraft fleet to minimizing cost. Walmart has invested huge sums in high-tech distribution data analysis and building a strong brand image around low prices. These are not flexible investments, and there is no plan B for either company if their costs end up being uncompetitive. That means that, at some point in the future, some competitor may come up with an approach that makes these large operations completely obsolete. If you think that idea is far-fetched, take a close look at how Walmart ended up taking the discount store crown away from Kmart.
What does this mean for your company? It means you need to take a serious look at any strategic choices that may take you down the commodity road. Those choices could work for you, or they could be a trap. Can you tell how it will play out for you?
Is your company having a hard time developing your strategic plan or thinking strategically? Let us know how you are dealing with it – or, better yet, attend our amazing, data-driven workshop on Simplified Strategic Planning to learn how to develop and implement your strategic plan. Our highly acclaimed Simplified Strategic Planning approach has helped many hundreds of organizations improve their strategies and bottom line results with effective, actionable strategies. Please listen to our webinar: Why my strategic planning isn’t working.
© Copyright 2016 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution