My Pet!

Your low cost competitors will not just nibble at your low price segment, they want
to eat your lunch

Many industry leaders are faced with a sea of changes in the marketplace, particularly the
onslaught of many low cost competitors. They are minnows and will grow to become
sharks if they are not nipped in the bud. Examples abound on the proliferation of the
Chinese products in the world market.

The way to handle these manufacturers is to try to nip them in the bud. It is like war.
You must not allow your competitions to establish a beachhead. For once they succeed
in doing so, it will be so much harder to dislodge them. You want to knock them out in
the waters where they are most vulnerable. When customers try the low cost products
and they like them, it will be very difficult and expensive to entice them to switch back to
your products. If you cannot beat the low cost competitors in the price game everything
else being equal, then better to identify another premium niche.

Johnson and Johnson the health-care multi-national company also faces stiff competition
and a long wait for the next drug blockbuster. As part of its strategies to hold off
competition, it has gobbled up 34 companies in the past 5 years and will keep acquiring.
Johnson and Johnson also put existing drugs to new uses - epilepsy drug Topomax now
treats migraine. Workers are made to cross the divisional lines to develop products and
drug-delivery systems including treatments for stroke, diabetes and schizophrenia.

Teamwork between pharma and device divisions led to the billion-dollar coronary stent.
Cost-cutting on the 200-plus units, merger of the back-office operations and centralized
purchasing helped to save $1 billion in two years - funds that it will use in the
development of badly needed new pharmaceuticals.

On the other hand, Hoover, which makes vacuum cleaners since 1907, has shrunk its
unionised staff strength from 1,800 just over 1,500 in 1994. The Chinese competitors
have been selling cheap vacuum cleaners at $79. Hoovers with price tags of $200 and
higher cannot compete and was caught unaware. These Chinese low-end models already
have 40% of the market. Hoover tried layoffs, new vacuum-cleaner features etc, but to
no avail. On the other hand, the market leader Whirlpool is up 38% in sales revenues and
just boosted its 2004 profit outlook. Whirlpool no longer sells vacuum cleaners and
diversified into other household appliances.

As mentioned earlier, the Port Authority of Singapore (PSA) also lost its competitiveness
when Tanjong Pelepas in Malaysia stole away PSA’s number one and two customers
with cheaper pricing. The Singapore government has learnt this lesson and is responding
quickly to the threats of low cost budget airlines and regional air hubs. Airlines can also
bypass Singapore Changi Airport and fly directly from Australia to Europe or Middle
East to US avoiding stop over in Singapore. Singapore Airlines is introducing the budget
airline Tiger to compete in this sector as well as to boost its premier airline image through
the offers of new planes and non-stop direct flights to the US. Singapore Changi Airport
is building a terminal for budget airlines. The Singapore government came down hard on
the Singapore airline pilots to ensure that the national airline is not dragged down by
labour disputes. The airport terminals are also undergoing renovation and upgrading. The
jury is still out as to whether all these proactive measures can effectively maintain the
competitiveness of the air transportation and aviation industry in Singapore. However,
this is better than waiting for the low cost competitors to gobble your lunch right under
your noses.

Another case in point is the ball-point and fountain pen competition. Ball-point pens
were much cheaper, easier and less messy to use. The fountain pens were beaten face
down and lost almost all the market share to ball-point pens. Then somebody thought of
making the fountain pen a luxury item. The fountain pen was sold for US$ 400 and
positioned as a prestigious and luxurious item, similar to the jewel wear. The
manufacturers of fountain pens such as Parker, Sheaffer and Mont Blanc have then
comfortably locked into the high-end segment which the ball-point pens cannot penetrate.

Today, both the fountain and ball-point pens co-exist each has its own market niches.
You need to be wary and be prepared to thwart off the moves of these low cost
competitors. This is why Howard H Stevenson in his book said: “Do lunch or Be
Lunch.”

http://www.corporateturnaroundexpert.com

Dr Mike Teng (DBA, MBA, BEng, FIMechE, FIEE, CEng, PEng, FCMI, FCIM, SMCS) is the author of the best-selling business book “Corporate Turnaround: Nursing a sick company back to health”, in 2002. In 2006, he authored another book entitled, “Corporate Wellness: 101 Principles in Turnaround and Transformation.” Dr Teng is widely recognized as a turnaround CEO in Asia by the news media. He has 27 years of experience in corporate responsibilities in the Asia Pacific region. Of these, he held Chief Executive Officer’s positions for 17 years in multi-national, local and publicly listed companies. He led in the successful turnaround of several troubled companies. He is currently the Managing Director of a business advisory firm, Corporate Turnaround Centre Pte Ltd, which assists companies on a fast track to financial performance. Dr Teng was the President of the Marketing Institute of Singapore (2000 - 2004), the national body representing some 5000 individual and corporate marketing professionals in Singapore

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Perfect competition is a microeconomic model, to the most common traits of which belong the following: - a large amount of small producers (sellers) of a homogenous product; - a large amount of consumers; - both consumers and producers can not influence the price on their own; - mobility of all resources; - operational costs are zero; - equilibrium price (determined by the intersection of supply and demand curves); - lack of barriers to enter or exit from the market.

Under conditions of perfect competition the price is equal to marginal revenue and, in its turn, marginal revenue is equal to marginal costs.
When a company loses money, then it is time to decide whether to continue operating on the market or to shut down. In order to make a right decision it is necessary to analyze total revenue and total costs (fixed and variable). As far as the fixed costs are equal whether the company operates or shut down, variable costs are equal to variable. So if the price per product unit is less than the costs per product unit it means that total revenue (quantity of product multiplied by price) is less than total costs (fixed plus variable) and the company should shut down. Of course, if total revenue is larger than total costs the company should continue operating. When total costs are equal to total revenue - it is called the shut down price and it does not matter for company whether to shut down or operate further.

In the long-run companies receive zero economic profit and thus other companies are not interested in entering the market (it means that market participants completely satisfy the demand). But if the demand suddenly increases - the prices would increase too and thus new participants would enter the market until the price won’t become equilibrium.
In practice, perfect competition does not exist as others. This model is abstracts and describes the market in general terms. As the most common example there is used local agriculture sector: there are many producers and consumers, the price is close to equilibrium, there are not enter or exit barriers; but operating costs can not be zero because it takes time, efforts and some costs to sell the product; resources are not absolutely mobile.

I would like to introduce my own example and explain why do I think it is quite suitable one: e-trading. Trading through the Internet is very popular now - there are many sellers and consumers, there is no any serious obstacles or barriers to enter or leave the market, if to take more precise example - books e-trading - than the product becomes quite homogenous, the price level is quite close to equilibrium and producers can not seriously influence it nor can customers, resources are quite mobile (especially information - there are plenty of resources in the Internet), transaction cost are quite low (but not zero of course).

If the average price of the product, book in our case, is larger than average variable cost, costs on selling and delivering book in our case, then the company receives profit and it can be said that it operates successfully (in the long run there will occur incentives to enter the market); inside out some companies, most probably, would leave the market and may be try to sell something else.

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Finally, I would like to conclude that perfect competition is quite abstract microeconomic model, which describes market under the certain conditions (which can not be absolutely met in practice, but can be met close enough). But this model gives good economic basis for firms to think in advance about their operational activities or business decisions.

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The management mantra of the 1980s was product quality, and activities involving
Quality Control (QC) circles, Total Quality Management (TQM) and ISO 9000 were the
order of the day. Back then, consumers were willing to spend enormous sums for quality
products. However, product quality has significantly improved and today having a good
quality product is a mandatory requirement for the company’s effective participation and
survival in the marketplace.

Subsequently, the management slogan in the 1990s embraced technology as the cure-all.
Companies then tried to distinguish themselves from their competitors through the use of
technology, by offering better and more sophisticated features, use of the Internet and
communication systems. Huge sums were channelled into technology to build a better
mousetrap with more superior state-of-the-art features. Today, the world does not beat
down the door of the better mousetrap developer. The collapse of the high tech stocks on
Nasdaq in the early part of 2001 illustrates the vulnerability of technology.

The thrust in the new millennium is competition. Competition intensifies with the
emergence of a better range of products that are often of superior quality coupled with
attractive and affordable pricing. In such a scenario, many products become marginalized,
and like commodities, pricing becomes a key determinant in a shrinking market.

In today’s competitive environment, your margins for errors are also thinner. In the past,
three strikes or major mistakes and you are out, but today, one strike or major mistake
and you are history. Customers have many choices and they will switch their suppliers at
the turn of the dime if you make a major error in quality, delivery, etc.

Oftentimes, the elusive competition quietly sneaks in by the back door. You may have
been losing trickles of disgruntled customers and one day, you come to the sudden
realisation that even your major customers are gone.

PSA Corporation learnt too late to retain its number one customer, Maersk from
switching to Port of Tanjong Pelepas in Johore. After PSA Corporation rejected the
requests for better terms of AP Moller Group, parent of Maersk Sealand, the world’s
largest operator of container ships, the Copenhagen based company moved the operations
to Tanjong Pelepas and also took a stake in the port. This was a double whammy for
PSA Corporation as it not only lost its biggest customer, it has to compete against its
former ally. With the help of Maersk, Tanjong Pelepas is able to capture Evergreen, PSA
Corporation’s second largest customer. . PSA had tried to compete on efficiency and fast
turnaround of clients’ ships. But this could only justify for some price premium for up to
a point. Consequently, PSA Corporation has to downsize in order to stay competitive, a
tad too late as it has lost its top two customers within a short period.

Competition may lead to opening up new markets. For instance, with the advent of the
low budget airlines, more poor Indonesians are also able to travel overseas. This is the
market segment, which most major airlines such as Singapore Airlines will ever wish to
target. But one should never under estimate or take the competition for granted.

Competition is a silent and sudden killer like heart attack, it can creep up on you without
warning. However, just as an individual can prevent this disease by adopting a healthy
lifestyle, a company can stave off competition by remaining alert and adopting
appropriate strategies to combat it. When you are faced with increasing competition, you
may still survive, prosper and succeed, but it is no longer business as usual.

http://www.corporateturnaroundexpert.com

Dr Mike Teng (DBA, MBA, BEng, FIMechE, FIEE, CEng, PEng, FCMI, FCIM, SMCS) is the author of the best-selling business book “Corporate Turnaround: Nursing a sick company back to health”, in 2002. In 2006, he authored another book entitled, “Corporate Wellness: 101 Principles in Turnaround and Transformation.” Dr Teng is widely recognized as a turnaround CEO in Asia by the news media. He has 27 years of experience in corporate responsibilities in the Asia Pacific region. Of these, he held Chief Executive Officer’s positions for 17 years in multi-national, local and publicly listed companies. He led in the successful turnaround of several troubled companies. He is currently the Managing Director of a business advisory firm, Corporate Turnaround Centre Pte Ltd, which assists companies on a fast track to financial performance. Dr Teng was the President of the Marketing Institute of Singapore (2000 - 2004), the national body representing some 5000 individual and corporate marketing professionals in Singapore

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