When companies underestimate low-cost rivals

Attackers are threatening premium players in market after market—and not only at the low end.

JUNE 2010 • Adrian Ryans

When low-cost competitors appear, one of the toughest decisions facing executives in companies with premium products and brands is whether to respond. Should the company or business unit adjust its strategy to meet the low-cost threat or should it continue business as usual, with no change in strategy or tactics?

As these established companies attempt to define the nature and magnitude of the challenge, they often underestimate it. … Complacency and arrogance produce blind spots that delay a response and leave incumbents vulnerable.

But our study of low-cost competitors suggests that they also build momentum in slower-moving and more subtle ways—factors that established players might do well to pay closer attention to. At times, low-cost challengers build their presence stealthily by competing in undeveloped segments of a market. Or they can narrow capability gaps by tapping the look, feel, and suppliers of bigger rivals. In other cases, competition between low-cost entrants can produce unintended second-level effects that escape the notice of incumbents until it’s too late to prevent a severe erosion of their market position.

Taking time to gain momentum

If the new low-cost challengers are competing in undeveloped segments on the fringe of the incumbents’ market, the initial sales impact may be muted. … This dynamic is a particular issue for companies operating in developing markets, especially in second- and third-tier cities or in rural areas, where market data are often much less transparent than they are in more mature markets. In some cases, low-cost players tap segments that take time to develop; they may require significant changes in behavior and new infrastructure to support growth. Typically, these types of changes do not happen overnight. …

As a result of the dramatically lower prices that companies such as easyJet, Ryanair, and Southwest Airlines have brought to the air travel market, customers have quietly adopted new forms of behavior that in turn rewrite the rules of the market. More people in Europe take weekend breaks in countries that are farther afield; before the rise of the low-cost airlines, these passengers would have traveled locally or regionally. Many workers in one part of Europe take advantage of job opportunities hundreds of miles away. Some doctors who live in continental Europe have part-time practices in the United Kingdom to help meet a practitioner shortage in certain regions. Even people with relatively low incomes, such as construction workers, “commute” between their homes and families in central and eastern Europe and their jobs in western and northern Europe. As prices fall and new kinds of behavior are established, growth accelerates rapidly.

Filling resource and capability gaps

Some low-cost competitors rise more quickly than premium players anticipate by finding clever ways to overcome capability gaps. For example, when low-cost attackers get under way, they may copy the products of premium companies, sometimes matching designs, colors, model numbers, and promotional materials. (One Chinese manufacturer of textile machinery even helped its customers identify the product they should choose by indicating, in its own model numbers, both the premium brand and the model being copied.) In many industries, intellectual property can be licensed and used for a modest fee. Also, low-cost competitors have acquired interests in companies with access to desired technology, distribution channels, and customer relationships.

Sometimes, low-cost competitors close quality and performance gaps with their premium rivals by taking advantage of support from customers and suppliers that are trying to protect and further their own business interests. Customers are often quite keen to have more competition among suppliers and in some cases help low-cost suppliers upgrade their offerings by providing information and support. Suppliers of capital equipment and parts used to manufacture products are eager to see low-cost competitors buy the latest equipment and components. Often, this material incorporates information from the suppliers’ premium customers and represents a transfer of knowledge and experience that may have built up over decades.

The role of second-order effects

The initial impact of low-cost players on incumbent companies may not be the most important consideration. In many markets, if they are relatively easy to enter, a number of low-cost competitors may do so. … But as direct competition intensifies, one or two of the low-cost companies—sometimes “losers” in price wars in the market’s lower tiers—may try to escape it by differentiating their offerings and moving up in the market. The strategy of these losers often poses a much more direct and formidable threat to the traditional players than the original low-cost strategy, since the attackers typically offer an enhanced product or service built on a low-cost base. …

Sometimes second-order effects derive from the interplay between a low-cost competitor’s offers and the behavior of customers over time. One Indian chemical producer initially sold only a narrow range of offerings, but high volumes and low changeover costs allowed it to undercut a US rival in the European market and to capture a high share of sales. … [The] low prices would lead customers to rethink how they could formulate a broader range of their products to take additional advantage of the Indian producer’s relatively inexpensive chemicals. More volume shifted to the Indian producer, leaving the US company with an increasingly less economic mix of products.

Fighting back

Premium-brand companies have a few options for responding to these subtler attacks on their market position. The possible responses range from directly confronting a low-cost competitor in its market segment by launching competitively priced products to adjusting strategy in an attempt to isolate the business from the low-cost threat. … A customer focused primarily on product quality and reliability, for instance, may switch to a low-price offering if its producer can show that it is good enough in these respects. By contrast, customers attracted to a premium brand because it offers a total solution—for instance, financing, very high levels of technical support or service, and strong personal relationships—may be much less likely to switch. Premium players could therefore focus on selling solutions rather than physical products. …

Executives always regret it when they don’t anticipate the scope of a low-cost threat and respond forcefully. To be sure, a failure to see competitors is an example of the forces of “creative destruction” at work in capitalism. But companies alert enough to identify the nature and magnitude of the challenge will be in a better position to find ways to hold the new competitors at bay.

About the Author

Adrian Ryans is a professor of marketing and strategy at the International Institute for Management Development (IMD), in Lausanne, Switzerland. This article is based partly on his book Beating Low-Cost Competition: How Premium Brands Can Respond to Cut-Price Rivals (Wiley 2009).

Danger, danger! Tech overload ahead

InfoWorld

Researchers say our tech fixation is causing us to lose focus and become forgetful. Cringely says that's all a crock of ... what were we talking about again?

…I want to talk about yesterday's New York Times Website, which has an entire series of articles about how technology is rewiring our brains, and not in a good way.

Apparently, technology overload ruins your ability to concentrate and causes you to repeat yourself. It also ruins your ability to concentrate and causes you to repeat yourself.

I think I read that somewhere.

The more technology you consume, the more you multitask, the more gadgets you own and use, the more email/ facebook/ Twitter/ text messages you manage, and the more you multitask, the more your brain begins to resemble a finely aged hunk of Swiss cheese -- or so says the Times.

All I can say is, thank God. I thought it was all that Lemon Pledge I'd huffed in college. Instead, it's information/gizmo overload. In other words, my brain problems are something I might be able to file a Worker's Comp claim for.

According to the Times:

In 2008, people consumed three times as much information each day as they did in 1960. And they are constantly shifting their attention. Computer users at work change windows or check e-mail or other programs nearly 37 times an hour, new research shows. …

I'm not sure what the rest of that article said because there was a link inside to a game that tested how good I am at ignoring distractions … I was doing pretty well at it until I noticed another test for how fast I am at juggling tasks. …

I was doing OK on that one until my cell phone started buzzing. I didn't recognize the number, so I listened in as the caller left me a voice mail. Yep, another PR drone calling to see if I'd received their press release -- good thing I didn't waste any time on that.

Admittedly, I often feel like that guy in "Memento" (what was his name?) who had no short-term memory at all and survived by tattooing important information on parts of his body, which explains why I woke up to find “Milk, eggs, light bulbs” written on my thigh this morning -- at least, I hope it does.

Back to the Times article:

A portion of the brain acts as a control tower, helping a person focus and set priorities. More primitive parts of the brain, like those that process sight and sound, demand that it pay attention to new information, bombarding the control tower when they are stimulated.

So while your brain is trying to get that Boeing 737 into the air (drive to work), Bruce Willis has sprinted onto the runway (new text messages) and is trying to wrestle it to the ground (fender bender).

At least, that's what I think it was saying. The rest of that paragraph was continued on page three of that story, and I never read past page two.

Another link on that page leads to an article that likens tech addiction to food disorders:

The problem is similar to an eating disorder, says Dr. Kimberly Young, a professor at St. Bonaventure University in New York who has led research on the addictive nature of online technology. Technology, like food, is an essential part of daily life, and those suffering from disordered online behavior cannot give it up entirely and instead have to learn moderation and controlled use.

… I didn't finish that article either. However, I did click a link to a graphic that lists some of the warning signs that you're hooked on tech. Among them:

• You always check your email before doing anything else
• You try to hide how long you've been online
• You choose to spend time online instead of going out with others
• You weigh 400 pounds and live in your parents' basement

OK, I made that last one up. But the other three -- well, that's not me, but I have this really good friend, and boy does he have a problem. You have to pry the keyboard out of his hands with a spatula.

Incidentally, while I've been writing this, 132 of my Facebook friends have “Liked” the same New York Times article. And three of these people I've actually met. Isn't technology wonderful?

Hmm, I feel like there was something else I wanted to talk about but forgot. Oh well, it'll come to me eventually.

How has tech overload affected you? Post your tales of digital despair below or email me: cringe@infoworld.com.

This story, "This is your brain on tech" was originally published at InfoWorld.com. Read more of Robert X. Cringely's Notes from the Field blog.

Wellness infused with motivation, measurement and management

Employee Benefit News

By Bruce Shutan

The blind spot of employee wellness programs is they tend to focus on telling employees what they should be doing to live healthier without addressing how people are motivated to make changes or helping sustain desired behaviors. ...

Participation in {one well-structured wellness} program can range anywhere from 40% to 85% depending on how a company designs their program and what incentives they offer, whereas ... the number tends to be only about 5% to 15% among traditional programs. Moreover, because the focus is on motivation, measurement and management, corporate clients have reported a return on investment that’s as high as 5:1 over the course of a year based on lower medical costs and precursor conditions to chronic illnesses and an increase in employee productivity.

Culture of prevention

One strategic position that {this wellness program} seeks to reinforce when helping companies develop a culture of prevention that rewards personal responsibility is that the interests of employers and employees are aligned because both parties are seeking to contain mounting health care costs.

Many of these expenses are clearly preventable in that they’re related to lifestyle – producing poor health outcomes that are driving down productivity, spiking absenteeism and disability claims, triggering presenteeism and threatening profitability.

Milliman Inc. analysts recently noted that a typical family of four will spend $18,074 on average for medical care in 2010 – a 7.8% increase from the previous year. But perhaps most alarming is that the Centers for Disease Control and Prevention estimate that 75% of the nation’s health care costs, or $1.5 trillion, are traced to chronic diseases, most of which are preventable. …

{a well-structured wellness program} favors budget-neutral employee incentives that are aligned with preventative strategies that result in healthy behaviors. The approach is akin to a good-driver discount in that individuals who exhibit healthy behaviors are rewarded just as those with an accident-free driving record. Employees who participate in health and wellness programs, for example, would be eligible to receive a discount on their monthly health insurance premiums …

The initial focus is on physical activity because of its high impact in preventing diseases that are driving health care cost increases, as well as how easily it’s measured. … [It’s] easy to track the number of miles walked or calories burned by simply wearing a pedometer.

Making programs fun

Another key component of this proactive approach is to encourage social interaction with friends and colleagues, which often drives physical activity on a daily basis. … But in order to do these programs justice, employers need to recognize that there are different behavioral levers to motivate employees.

...[A] biometric measurement station ... enables employees to track key measures such as their weight, body fat and blood pressure.

… Using these measurement stations provides real-time and accurate data that’s provided to the employer in an aggregated fashion ... So employees get to accurately track their progress over time and the company gets to track the results of their employee population as a whole. ...

To learn more, download the Virgin HealthMiles white paper, PAY-FOR-PREVENTION™:An Emerging Health and Productivity Paradigm.

About the author Bruce Shutan, former managing editor of Employee Benefit News, is a freelance writer based in Los Angeles.

When Millennials Rule the World

June 1, 2010 (PLANSPONSOR.com) – A new study finds workplaces will be different when Millennials are CEOs.

The survey, titled Millennial Inc., conducted by the marketing firm Mr. Youth and the market research firm Intrepid, indicates the long boardroom table will be replaced with round tables, as Generation Y values collaboration, shared responsibility, and consensus.

The quantitative study completed by nearly 1,000 participants found 82% of Millennials believe it is important to have a staff that can do each other’s jobs. More than half (54%) of Millennials prefer to make decisions by consensus, and that number shoots up to 70% when they are among their peers.

While 401(k)s and stock options are nice, Millennials need to be in an environment that continually keeps them stimulated and engaged or they will keep looking. The study found the number one reason in both the UK … and U.S. … for switching jobs was, “Just needed a change,” - far exceeding the desire for a better salary, benefits, or a more senior position.

The study noted the average 26-year-old has changed jobs seven times from age 18, in search of something more.

… With Millennials, authority is earned and proven through direct interactions, not given blindly based on titles and experience. In creating virtual companies during the study, Millennials designed a model that required each employee, despite title or skill set, to start at the ground level and move her way up through the company.

This approach ensured that every “employee” would have some face-to-face contact with his customer base and experience the brand firsthand. Those who excelled would be promoted quickly and paid more for their ability, rather than being rewarded for a demonstrated facility in corporate politics. Many Millennials believe that high-level executives lack proper understanding of the front lines of their own business.

Millennials believe individuals with big ideas are successful and gain respect through their work, and they expect this to be true everywhere, especially in their career.

In addition, the study found Millennials view technology as a facilitator that allows companies to cater to consumers and create uniquely personal experiences.

More about the study is here.

Rebecca Moore editors@plansponsor.com

Investors Tap Into 401(k) Money Tax-Free for Business Startups

BusinessWeek

May 27, 2010, 6:28 AM EDT

By Amy Feldman

May 27 (Bloomberg) -- Hal Mottet, a Lake Oswego, Oregon, businessman bought a family-owned packaging company for $3.5 million in late 2007, and he and a partner financed 40 percent of the sales price with their retirement money.

Mottet and his partner used a loophole in U.S. tax law to roll over $1.4 million from their existing 401(k) retirement plans to finance the purchase of Carson, California-based Empire Container Corp. The strategy saved them taxes and penalties they would have faced for cashing out the plans.

“If we hadn’t done it this way, we would have had at least $1 million more debt, and we wouldn’t have made it through the recession,” said Mottet, 51, who’s now chief executive of the firm. “It’s been a fantastic investment.”

Transactions like Mottet’s let entrepreneurs access their retirement funds without tax consequences. Withdrawals from 401(k)s are generally subject to income taxes on the proceeds, and cashouts done before age 59 1/2 incur a 10 percent penalty, according to the Internal Revenue Service.

Here’s how it typically works: An investor sets up a corporation, establishes a new 401(k) plan there, rolls over his or her existing 401(k) or Individual Retirement Account, and then uses part or all of the plan’s assets to buy shares of the new company. This funds the new business, while keeping the tax- advantages of the retirement plan.

The transactions have drawn the scrutiny of the IRS, which dubbed them ROBS, for Rollovers as Business Startups, and said in an October 2008 memo that some may run afoul of the law. The IRS is coordinating efforts with the Department of Labor because these rollovers may also raise issues under the rules that govern retirement plans, according to the memo.

Not ‘Home Free’

“Like many other recently marketed tax savings strategies that appear to have been designed to take advantage of the law, ROBS arrangements, designed to fit within existing law and guidance, do not present a ‘home free’ result,” the IRS said in a November 2008 newsletter. “In fact, they may violate the law.”

Among the issues the IRS found were prohibited transactions, questionable valuations of the company stock, and a failure for the rollover retirement plans to be available to employees other than the principal owner. …

Monika Templeman, acting director of employee plans for the IRS, said the agency would be reviewing these rollover transactions, and auditing them on a case-by-case basis over the next few years.

“It can be done just right, but we’re seeing problems,” Templeman said. “It’s open to abuse because of the structure, and the promoters are taking advantage of that.”

‘Saber Rattling’

In cracking down on tax shelters, the IRS generally goes after the promoters of a shelter, she said. She declined to say if the IRS was targeting any rollover promoter.

Stephen Dobrow, president of Primark Benefits, a Burlingame, California-based benefits consulting firm, called the IRS memo “saber rattling,” and said he expected increased IRS auditing of the transactions….

The rollovers are a relatively inexpensive way to finance a new business, said Jeremy Ames, chief executive of Bellevue, Washington-based Guidant Financial Group, which advised Mottet on the process. …

Cashing Out

…Joanna and Frederick Neubert, of Cleveland, South Carolina, used a 401(k) rollover to buy a residential cleaning franchise in 2004, after both were laid off from corporate jobs. The Neuberts used the entire $118,000 proceeds from their 401(k) plans, Joanna Neubert said. Last December they closed the business.

Risking Future

The result for the Neubert’s retirement savings: The business was valued at zero, and their 401(k) savings are gone, according to Joanna Neubert.

Of the rollovers that the IRS has reviewed, many of their sponsors had gone bankrupt, Templeman said.

“Our thinking tends to be that if you can’t raise enough money with friends and family and people who find your business compelling, it may not be a business that should be started,” said Dan Rosen, a principal in the Lexington, Massachusetts, office of venture capital firm Highland Capital Partners.

“There are a lot of ways to get a business funded without risking your future,” he said.

Investors using this strategy also may face risk of an audit. If a rollover transaction is deemed to be a tax shelter, its plan sponsor or manager may be subject to excise taxes, in addition to regular taxes and penalties, according to IRS regulations. …--Editors: Rick Levinson, Rob Urban.

To contact the reporter on this story: Amy Feldman in New York at afeldman16@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.