This is one of the most common questions that executives at all level ask me. Indeed, it is possible to destroy your competitors, but it is important to remember that:
- It is not easy.
- It takes time.
The most successful competitive strategy focused on destroying your competition altogether comes from the airline sector. Companies like Virgin Airlines, JetBlue, and SouthWest Airlines have methodically destroyed their competitors. I would like to encourage you to read more on how these companies did it. In this article, however, I would like to discuss the automobile sector competitive dynamics as it is playing out in the US as we speak. So you can watch it happen as we speak. (Related article: Strategy of airlines is not sustainable)
General Motors, that has no clear strategy to put its business on track, came up with two less than brilliant ideas – cut costs (through layoffs and plant shutdowns) and drop the prices. While market share can sometimes create shareholder value, in most cases, a desperate rush to gain share without worrying about the bottom line is disastrous, and that is exactly what is going to happen to GM. You would probably think that other automakers would be smart enough to not fall into the trap, but Chrysler and Ford have already become the victims of this poor strategy. In other words, we have what is called a “price war’ – a disastrous strategy for everyone who agrees to play the game.
So who is destroying who? The Korean carmakers, Kia and Hyundai, have been acting as strategically as Virgin Airlines, JetBlue and SouthWest Airlines did. By competing on lower prices, these two companies grabbed market share, and are now forcing GM, Ford, and Chrysler to lower their prices – exactly what they wanted them to do. Why is this a good strategy for Kia and Hyundai? These two companies can offer lower prices because their business model is based on a lower cost structure. That is not the case with any of the American car companies. In fact, lower selling prices means that everyone in the automotive value chain is being squeezed and that can not last for too long unless the business model is changed. So I expect that while the American automakers may be able to gain market share in the short term and may even be able to show good financial performance, none of their long-term problems have been addressed.
What does it mean for you?
- Never, NEVER, engage in a price war. It does not help. Instead, fine-tune your business model.
- Do not hope that market share gain will translate into profits. Businesses exist not for market share, but for profits. Unless you have a secret recipe for gaining market share along with higher profits, do not attempt this strategy.
- If you are faced with a low-cost competitor that wants to compete on price, do not fall into the trap. On the contrary, provide even more value to your customers so that you can demand even higher prices. Unless you are Wal-Mart (or in other words, you have the scale), you can not fight a price-war forever.