Competing with value-based rivals


Companies offering the powerful combination of low prices and high quality are capturing the hearts and wallets of consumers in Europe and the United States, where more than half of the population now shops weekly at mass merchants like Wal-Mart and Target, up from 25% in 1996. These and similar value players, such as Aldi, ASDA, Dell, E TRADE Financial, Jet Blue Airways, Ryanair, and Southwest Airlines, are transforming the way consumers of nearly every age and income purchase groceries, apparel, airline tickets, financial services, and computers.

The market share gains of value-based players give their higher-priced rivals definite cause for alarm. After years of near-exclusive sway over all but the most discount-minded consumers, many mainstream companies now face steep cost disadvantages and lack the product and service superiority that once set them apart from low-priced competitors. Today as value-driven companies in a growing number of industries move from competing solely on price to catching up on attributes such as quality, service, and convenience, traditional players are right to feel threatened.

To compete with value-based rivals, main stream companies must reconsider the perennial routes to business success: keeping costs in line in line, finding sources of differentiation, and managing process effectively. To succeed in value based markets, companies are required to infuse these timeless strategies with greater intensify and focus and then execute them flawlessly.

Differentiation, for example, becomes less about the abstract goal of rising above competitive clutter and more about identifying opportunities left open by the value players’ business models. Effective pricing means waging a transaction-by-transaction perception battle to win over those consumers who are predisposed to believe that value-oriented competitors are always cheaper.

Competitive outcomes will be determined as always, on the ground—in product aisles, merchandising displays, process rethinks, and pricing stickers. When it comes to value based competition, traditional players can’t afford to drop a stitch. Value-driven competitors have changed the expectations of consumers about the trade-off between quality and price. This shift is gathering momentum, placing a new premium on and adding new twists to the old imperatives of differentiation and execution.


To counter value-based players, it will be necessary to focus on areas where their business models give other companies room to maneuver. Instead of trying to compete with Wal-Mart and other value retailers on price, for example, Walgreens emphasizes convenience across all elements of its business. It has expanded rapidly to make its stores ubiquitous, meanwhile ensuring that cost of them are on comer locations with easy parking. In addition, Walgreens has overhauled its in-store layouts to speed consumers in and out, placing key categories such as convenience foods and one-hour photo services near the front. To protect pharmacy sales, the company has implemented a simple telephone and online preordering system, made it easy to transfer prescriptions between locations around the country, and installed drive-through window at most freestanding stores. These steps helped Walgreens double its revenue from 1998 to 2002—to over $32billion, from $15 billion.


Value-based markets also place a premium on execution, particularly in prices and costs. Kmart’s disastrous experience in trying to compete head-on with Wal-Mart highlights the difficulty of challenging value leaders on their own terms. Matching or even beating a value player’s prices—as Kmart briefly did—won’t necessarily win the battle of consumer perceptions against companies with reputations for the lowest prices. Value players tend to price frequently purchased, easy-to-compare products and services aggressively and to make up for lost margins by charging more for higher-end offerings. Focused advertising to showcase “special buys� and the use of simple, prominent signage enable retailers to get credit for the value they offer and will probably become an ever-more-visible feature of the competitive landscape.

Ultimately, of course, the ability to offer even selectively competitive process depends on keeping costs in line. Continual improvement is necessary, suggesting an increasing role, in a variety of industries, for Toyota’s lean manufacturing methods, which aim to reduce costs and improve quality constantly and simultaneously. In financial services, for example, banks have used lean techniques to speed check processing and mortgage approvals and to improve call-center performance. Lean operation will probably emerge in more industries. Companies have on choice—those that fall to constantly take out costs may perish.