The battle for strategic advantage
New customer segments, emerging low-cost competitors, and new technologies are changing the world of global B2B companies. For traditional competitors – such as GE, Siemens, EADS, Alstom, Hitachi, and Mitsubishi – the strongest growth in the current business landscape is being generated in the low-price market. At the same time, the unit sales of Chinese mechanical engineering firms have overtaken those of German and US companies, with the Chinese products being simpler and less expensive.
What do the new competitors do?
This development has consequences the established western companies have to address, particularly so, as the new customer segments are also generating new domestic suppliers, which are growing in conjunction with their customer base. These suppliers have extremely low-cost structures, due in large part to low wages and the copying of existing technologies. As to the copying, though, they are not going to do this forever; Chinese companies, in particular, have invested heavily in research and development (R&D) focusing strongly on biotech, high-tech manufacturing, information technology, and alternative energy. There is no doubt that these investments will improve the performance of the Chinese companies in terms of quality and innovation, and enable them to slowly but surely serve upper-level customers as well as low-budget buyers.
Strategy #1, selling premium goods: Nevertheless, companies that have positioned themselves as suppliers of high-quality products are well-advised to continue their premium strategy – even if their relative market share will decline as a result of the growth in the low-end segments. The fact is that they are well-established and have learned to defend their competitive advantages in terms of innovation and quality.
Strategy #2, selling low-price products, too: However, if an established competitor wants to capture a big share of the emerging markets, they may opt for a second strategy, namely, frugal engineering or “no-frills technology.” In most cases, this means, to add low-price products to a portfolio and thus satisfy the demands of the low-budget customer group. One way of dealing with this means cost-cutting plus designing and developing new products. Ideally, this production should happen where the market is - in this case, in the emerging and developing economies. But as reasonable as it sounds, it actually requires a company to decentralize, with all the political and organizational changes involved. As a result, even the predominance of the traditional headquarter can be called into question, as in the case of Cisco, which opened a second headquarter in Bangalore.
Strategy #3, services: A third strategy is to increase the area of complex service solutions, that is, services that are customer-specific as well as complex. Take the example of a supplier designing and implementing a new IT architecture, or the work of a management consultancy. These companies depend entirely on their reputation and the trust their clients have invested in them. Accordingly, these customers are reluctant to switch to new suppliers, especially if the latter are newcomers in the field. This is why prestigious technology companies are increasingly offering complex service solutions and benefit from the substantial profit margin.
Can all three strategies co-exist? Some companies try to achieve a hat trick by pursuing all three options, that is, premium goods, no-frills products, and complex service solutions. The question is how, as the approach is quite demanding, as all three options require different types of employees, compensation systems, and management methods, so that creating useful synergies may be tough. But even if it is tough, it may be worthwhile to plan them. After all, the successful introduction of low-cost goods will open new markets that one day may be receptive to premium goods. The low-cost market may yield both market information and innovative ideas that will influence the premium product, just as the customers of a company’s services department will have ideas and demands that may enhance the company’s product offering.