As I have pointed out in a previous articles, imported product from low cost and low wage competitors are here to stay. The question I asked in that post was ‘what can you do’ when faced with this threat (Low cost imports are here to stay; so, what can you do?). There are actions that have been successful by firms in many developed countries that have worked successfully, as have there been failures. Some of these strategies have been highlighted in this post.
The term ‘strategy’ has many different and varied definitions as it can be applied, not only to business scenarios, but to a broad range of subjects The following definition by Alfred Chandler tends to sum it up well though; the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. To avoid imitation and to remain in a strong competitive position, incumbents will need to develop and implement new strategies to replace old actions which may now be ineffective. The ability to become a moving target to competitors is a key and incumbents may need to differ their approaches to product image, product breadth and innovation leadership if they are to enjoy market share gains. The competitiveness of a firm can be described as the ability of an organization to carry out a scope of competitive actions that allows them to capture and sustain a lead over rivals.
Low cost country competition increases incumbents need to look at product differentiation strategies. These strategies manifest in product innovation, offered services and speed to market. Incumbents in developed countries are more likely to have access to the latest technology required for product innovation. Deterring entry of new competitors by pricing aggressively and increasing product supply, may result in firms foregoing profit expectations for a period in an effort to keep their presence in the market for the long term. When competing against low cost competitors with existing products, it may be advantageous for firms to fill all product niches in the market. For new products, brand loyalty may be more beneficial and the use of increased advertising campaigns to the target market. If the low-cost competitor’s product quality is improving, the only choice for incumbents may be to further differentiate their product, if this indeed possible. Incumbents will need to assess whether new product introduction strategies are viable and not losing out due to cannibalization.
When a market is subject to new entrants, two distinct strategies emerge: pre-entry and post-entry responses. Pre-entry responses are price limiting in that incumbents will set a price under current profit levels in an effort to reduce the attractiveness to new entrants. Post-entry responses are when incumbents drop prices after a new competitor has entered the market in an effort to drive out competitors and deter would be rivals. If there is no effort to try and deter entry by the incumbents, price reduction may be the only alternative to maximize current profit levels. Incumbents are forced to lower prices due to an increase in supply and loss of market share. An incumbent will need to signal that any pricing reaction is associated with being good for the industry and not to be seen of weakness due to no other strategies being available.
When dealing with price as a strategy to compete, early studies predicted that incumbents will lower prices before competitors enter a market, and then leave them at the lower level after entry. This differs to recent studies on game theory that indicate that reducing price after entry could be a way for incumbents to drive out new rivals and deter any future competitors. Many incumbents prefer not to limit price when barriers to entry are low in an effort to deter entry. Surveys of U.S. and U.K. firms has shown that they rarely use pricing to deter entry. As with market share, it is imperative that those incumbents, who are at the greatest risk of loss of business, respond aggressively to new entrants.
The benefits of using speed are also important as it allows incumbents to limit the reshaping of customers preferences and removes any links the customers may have with the new competitor and a new ideal point. Reaction strategies have more success when implemented quickly by incumbents. Acting quickly can also lower any trials customers may undertake with the new rival. An incumbent will benefit from limiting the breadth of their reaction as this may dilute any effectiveness. The negative view of this however, is that it removes any late mover advantage the incumbent may have and that there are theories that condone slow retaliation. Typical reasons for incumbents to be cautious are; the importance of business under threat to the incumbent, a firm’s ability to retaliate quickly and the level of threat the new rival represents. By using speed, incumbents signal that they are committed to the market and are unwilling to lose sales and at the same time they are not hindered by any organizational inertia.
Continuous product innovation could be a successful defense for incumbents if the dominant design accepted by the market has been well established. Firms who show complacency and fail to innovate face increased risk for new entrants. Large firms are not generally associated with radical product innovations but more with incremental innovations that help to retain their dominant market shares. Small firms tend to be more proactive at introducing radical product innovation. This ‘incumbents curse’ causes firms to become apathetic to new product development due to the amount of investments they have in the existing market. Radical innovation can change the shape of industries and leads to better products for a market. New entrants into a market may see the opportunity to introduce radical innovations as a way to grow their presence in a target market. Incumbents may feel there are few incentives for them to do so due to a lack of perceived incentives and organizational routines.
Limiting access to distribution channels can lock out competitors and force them to either bypass established channels or create new ones. It may be essential for incumbents to nurture existing distribution channels to lock competitors out. If there is a presence of certain industry standards that incumbents can claim to own, there exist some advantages that they can use over new entrants. Incumbents will need to ensure that any firms that they have cooperative strategies with do not become competitors if they feel there are benefits in doing so. The chance of this occurring can be reduced if trust is present in the relationship; this allows both parties have enough faith in the relationship that any problems will be resolved.
Excess capacity may be another strategy incumbents can use with a pricing strategy, or in isolation. In can allow incumbents to have a post entry increase in capacity whilst committing to lower post entry prices, making entry less attractive to new competitors. Studies that have been done in the past have however, found no evidence that firms have tried to deter entry by investing in excess capacity.
It is imperative that firms constantly build new competitive advantage faster than ever before, whilst simultaneously destroying their rivals’ advantages. Firms must move rapidly to create new competitive positions, exit old ones and compete with rivals’ activity. A strategies success depends on the features that customers place value on, not what the company values. Some firms use intangible benefits to keep customers. They spend large amounts of money offering services to customers without understanding if their customers want them. If firms can calculate a cost associated with these secondary benefits, they could use the information to educate their customers that there are some services worth paying a premium for.
Warren Coppard 
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