BY BHANUTEJA V.R

LOW COST PROVIDER STRATEGY

• Low–cost leadership through providing lowest cost provider in the industry

• More than a competition surviving is important • To have lower costs than rivals on the product of comparable

quality

The main intention of low cost strategy is to have either low cost pricing on the units or to have a consistent price on the units irrespective of market fluctuations

Two major approaches:Approach 1 – Cost efficient management of value chain activities Approach 2 – Revamping the value chain

Approach 1 – Cost efficient management of value chain activities

1. Economies of scale2. Experiencing and learning curve effects3. Full capacity operations4. Improving supply chain efficiency5. Using lower input costs6. Company’s bargaining power to gain concessions7. Technology up gradation8. Outsourcing 9. Motivation & company culture

Approach 2 – Revamping the value chain

10. Use direct to end user sales / marketing methods11. Increasing supplier's efficiency12. Reduced material handling

When does a low cost strategy work best?• Price competition is strong• Products form rival sellers are identical• Valued differentiation to buyers• Most buyers use product in some ways• Buyers incur low switching costs• Buyers are large and have significant bargain power• Newcomers with low prices

Key to Success Pitfalls 1. While identifying cost drivers 2. Benchmarking with competitors3. Cost improvement efforts4. Pursue investments

1. Aggressive price cuts 2. Low cost methods are easily imitated by rivals3. ignoring new features for products, declining buyer sensitivity on price 4. Technological breakthroughs

Success story of TOYOTA• Began as a textile company in 1926 (Toyoda Automatic Loom

Works)• In 1933 an automobile department was established within

Toyoda Automatic Loom Works.• In 1937 Toyota Motor Co. was established as an independent

company.• Becomes a major supplier of trucks to The Imperial Army

during WWII. • Plants were scheduled to be destroyed by allies, but the war

ended first.• In 1947 started passenger car production.• In 1958 sold their first cars in the U.S.• In 1959 opened first plant outside of Japan, in Brazil.

- Since then Toyota has maintained a philosophy of producing and designing cars in the countries where they are to be sold.• In 1989 the first Lexus was introduced after several years of

development.• In 1997 Toyota introduced the first hybrid (Prius) to the

Japanese market.

Place

• Toyota started their hybrid technology in Japan• After the high success in Japan, Toyota moved their Prius to the

US market where it has been very successful.• The first introduction of the Prius was in 2002 and since then

Toyota has come out with the Highlander and Lexus RX 400H and next year they will release the Camry.

• Most Toyota hybrid vehicles are available for purchase nationwide• Toyota Prius is offered nationwide but there are waiting lists for

the vehicles• Lexus first hybrid RX400H is available for purchase nationwide• Toyota Highlander has limited availability as of right now,

consumers can order the vehicle but they are not available on sales floors.

Promotion • Toyota Overall Promotion

The main promotion for Toyota hybrids is the tax deduction given to consumers who purchase hybrid vehicles

• Toyota Prius PromotionsBluetooth technology

• Option with in the Prius that if the consumer has a Bluetooth mobile phone, that allows customers with onboard navigation system and hands free phone capabilities with the vehicle

Land Speed Prius • Aiming for the younger market by having a race car that reached the

speed of 130.794 mphPrius is the national sponsor for the American Lung Association

• Lexus RX 400 HBeing marketed as the First luxury HybridThe slogan for the RX 400 H “ The heart of a Hybrid; The soul of a Lexus.”

• Toyota HighlanderLimited promotion because the Highlander Hybrid has limited availability right now

• Toyota CamryWas recently announced that the hybrid Camry will be available in 2006

Product

• The Toyota Prius and Highlander are both in transition from the introduction stage to the growth stage of the product life cycle

• Limited number of products are available through few competitors• Other competitors are becoming attracted to the market and will have similar

offerings soon• They are focused on building brand and customer loyalty. • The Toyota Sienna and Camry are still in development but will be ready for the

introduction stage soon• They are focused on promoting these products to create awareness• The product life cycle of all of Toyota’s hybrids may be shortened by the

introduction of other alternative fueled cars

Price • Toyota is offering high quality at a relatively low price in order to penetrate the

market• The Prius is priced the same as other five seater hybrids in its class but gets

much better gas mileage• Same price as the Honda Insight but holds three more people

Comparison• A hybrid Highlander SUV costs $5,000 more than the conventional Highlander• It delivers more horsepower than the conventional Highlander (30

horsepower)• It gets 10 more miles to the gallon• It greatly reduces the tail pipe emissions

FAILURE STORY OF WAL-MART IN GERMANY

There is fierce competition in the German grocery industry, and thus, low profitability in the food retail sector; profit margins range from 0.5-1%. The main feature of Wal-Mart's business model is to continuously cut costs and so offer lower prices than its competitors. Wal-Mart also continuously pressures its suppliers to cut costs.In 1997-1998, Wal-Mart acquired over 95 stores from existing German supermarket chains, making it the fourth biggest supermarket operator in Germany. The objective was to expand to 500 stores. However, Wal-Mart never grew from the original 95 stores. By 2007, it was bought out by one of Germany's largest retail groups. Ultimately, Wal-Mart left the German market with a loss of one billion dollars before tax.There are four key issues related to Wal-Mart's failure in Germany: (a) market structure and business model(b) cultural and communication(c) politics and regulation(d) product/service failure.

Market structure and business modelA retailer that wants to follow Wal-Mart's strategy of low prices needs to expand rapidly. In Germany, there were not enough appropriate locations to support such expansion. Wal-Mart did not build their own stores, but took over existing supermarkets that had a completely different business model - they were very small and had a limited range of goods. They were also located far apart, which resulted in high logistical costs.With their strategy of "everyday low prices," Wal-Mart is very successful in the United States and elsewhere. However, due to the extreme competition, Germans are accustomed to the low prices that are offered by numerous discount supermarket chains. For this reason, Wal-Mart's low price strategy did not create sufficient competitive advantage.Culture and communicationWhen products are introduced, it is important to consider cultural factors. Wal-Mart decided to operate its German locations from the UK. Thus, its "corporate language" was English. However, many of the older German Wal-Mart managers did not speak English. Some managers did not stay on after the Wal-Mart acquisition. Key business connections were lost, which resulted in the loss of major suppliers. It would have been far better to retain and communicate effectively with the German managers who had know-how about the local market.Politics and regulationWal-Mart's managers violated German laws repeatedly, simply because they were unfamiliar to them. For example, Wal-Mart always stays union-free, but Germany has a history of strong, politically powerful

unions. Ver.di, one of Germany's biggest unions, sued the company for failing to publish key financial statements in 1999 and 2000. A fine, as well as much negative press, harmed Wal-Mart's reputation.After its expansion strategy failed, Wal-Mart began a price war to drive small competitors out of business. One part of the price war was to introduce a private label called "Smart Brand" and sell most of these products below manufacturing costs. The reaction of many competitors was also to decrease their prices, which led to a profit setback for the entire industry. Finally, the Federal Cartel Office interceded and stopped the price war.

Product/service failureGood customer service, combined with low prices, could have been a new market niche in Germany. One part of Wal-Mart's customer service program was to ensure someone was always there to help. However, customer reaction was negative, because customers who normally do their grocery shopping in discount supermarket chains are used to self-service. They found this annoying, and it did not create a reputation for providing good customer service.ConclusionWal-Mart tried to apply its U.S. success formula in an unmodified manner to the German market. As a result, they didn't have sufficient knowledge about the market structure and key cultural / political issues. In addition, structural factors prevented Wal-Mart from fully implementing its successful business model. The final outcome was that it had to abandon its offerings in Germany. Had Wal-Mart paid careful attention to these issues prior to entering the German market, it could have had a very different outcome.

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