Discount Business Strategy How the New Market Leaders are Redefining Business Strategy

"Michael Andersen and Flemming Poulfelt provide a provocative discussion of the rapidly growing role of discounters across numerous industries: how they operate; how they create uniqueness; and how they can destroy value for incumbents. Understanding the specific moves and tools that the authors analyze will be valuable for attackers and incumbents alike."
?Adrian J. Slywotzky, Director, Mercer Management Consulting USA

"This book is very timely, dealing with today's most critical strategic issue: how to provide more value to the consumer through aggressive discounting. Those players in manufacturing and distribution who master this will be the winners; many established firms will fall by the wayside. A similar set of issues are facing many nations today - Europe vs. Asia!"
?Peter Lorange, President, IMD, Switzerland

"Andersen and Poulfelt have researched one of the most important themes in today's business world - how fundamentally new business models have wiped out establishments not with new products or technologies, but by creating new rules for conventional industries. Read this book and learn how to recognize the disruption of your industry before it is too late!"
?Sigurd Liljenfeldt, Senior Partner, Monitor Group, France

"This book asks if a firm can have its cake and eat it too - that is, maintain high quality at low prices. My favourite example and shopping place is big box Costco. Ikea is another. A must read for a broad audience concerned about corporate survival!"
?Professor Larry E. Greiner, Marshall School of Business, University of Southern California, USA

The aspiration to adopt the right strategy still prevails over the business world. But is there a single 'best' strategy for a company? Can an organization create sustainable competitive advantage from an 'off-the-peg' strategy? And are most companies likely to craft a strategy that genuinely creates uncontested market space and makes the competition irrelevant?

The answer to all these questions is probably 'No'. And the rising tide of companies like Dell, CostCo, Skype and Linux means that asking them at all may soon be futile. While strategists have foundered in old paradigms, a new breed of competitors has emerged. Value destroyers. Old-style thinking understood value destruction when it was confined to an industry and driven by a new product or technology. But what are the implications when the destruction stems from a new way of thinking - from a strategy that simultaneously creates value?

The implications are enormous. Every company in every industry is potentially at risk.

This risk - or opportunity - is precisely the reason for this book and its focus on exploring why and how some companies have bridged the gap between differentiator and cost leader strategies to emerge as winners in hypercompetitive markets, and what this entails in terms of value destruction and creation. Discounting organizations are here to stay - are you?

Foreword xi

1 Why are some companies more successful than others? 1

The real life laboratory 1

Creating value and simultaneous destruction 3

The volume game 6

Simplicity – the word of the day 10

Cut to the core 12

Service? Something we’d rather do ourselves 15

The black box of strategy turned upside down 17

2 The oxymoron of existing strategies: where do we go from here? 19

Conventional strategic thinking 19

The generic strategy framework 20

Porter challenged 23

Mixed strategies – the airline industry 26

3 When discount strategy becomes important 35

Hyper competitive markets and traditional strategy 35

The position of a discount strategy 38

A single form – a simple form? 41

4 CBB 43

Cultivating a hyper competitive market by way of a consistent approach to the notion of discount strategy 43

A contradiction to the bursting of the IT-bubble 43

The mobile sector – hyper-competition 44

CBB as the enhanced service provider 46

The original mission and strategy 47

Crisis and the filing of a petition for bankruptcy 48

The discount strategy – not a single quick fix 50

New management 50

Reinvention of the IT-systems 51

A new customer care concept 52

New brand and branding 53

Reverse relationship marketing 54

Political mass marketing 55

Reorganization of the distribution 56

Cost cutting programs 57

Active price leadership 57

CBB’s discount product – cheaper and better 58

Product production characteristics 58

Product marketing characteristics 62

CBB’s use of price as a tactical weapon 64

The importance of the price vis-a-vis the customers 64 `

Active leadership in price wars 65

Results – best in class 68

A revolution in the mobile sector? 70

Perspectives 72

5 Lidl 75

Gaining ground in a hyper competitive market by a consistent discount strategy 75

The German conquest 75

The grocery retail sector – hyper-competition 76

The original mission and strategy of Lidl 81

The discount strategy – all encompassing 82

Structured to control the impact of external factors 83

Leadership through continuity 84

The look and feel of Lidl 84

High service level with a discount concept 87

Squeezing the brands 89

Aggressive go to market strategy 91

Publicity through secrecy 94

Active price leadership 95

Lidl’s discount product – cheaper and better 96

Product marketing characteristics 99

The use of price as a tactical weapon 99

Active leadership in price wars 100

Results – top of the class 101

Perspectives 103

6 Ryanair 105

Reshaping a competitive market through a consistent discount strategy 105

Flying with the giants 105

The airline industry – liberalized to full competition 106

The early days of deregulation 108

Towards the liberalized sky with a new strategy 109

A transformed and polarized industry 111

Ryanair as the alternative independent carrier 114

Financial collapse evaded at the 11th hour 115

The no frills, low fare strategy – not just one route 116

New management 116

Cost cutting programs 119

Productivity-based compensation schemes 119

Outsourcing to third parties 120

Re-organizing sales and distribution 121

Harmonizing and scrutinizing the fleet 123

Customer care concept 125

New brand and branding 128

Political mass marketing 129

Active price leadership 131

Ryanair’s discount product – cheaper and better 132

Product production characteristics 133

Product marketing characteristics 135

The use of price as a tactical weapon 136

The customers’ perception of price 136

Leading the price wars 138

Results – Best in class 139

Perspectives – a revolution in the airline industry? 141

7 The building blocks of a discount business strategy 145

Maturity and liberalization in different industries 145

The building blocks of a ‘discount strategy’ 147

The product 150

The brand 152

The customers 153

Technology 155

The four blocks as one discount strategy 156

8 The attractiveness of the core product 159

From peaceful coexistence to disruption 159

Disruption and the corresponding value destruction 161

Lean and unbundled nature of the discount product 165

Self-service an important ingredient 172

Aggressive pricing 177

Demand-driven products 180

Value creation 182

Back to basics 184

9 A good brand is much more than a good brand 185

The growing importance of ‘brandr’ 185

‘You need to invest money in the establishment of a good brand’ 187

We cannot afford to spend 188

David against Goliath 193

The Gorilla image 199

Branding as a tool-kit in the discount strategy 204

Low prices as a new corporate social responsibility position 206

Brand extension and discount 207

The good brand 209

10 The discount customer and social capital 211

The pivotal role of the customer in a discount strategy 211

Customers as social capital 214

Social capital and the discount customers – the X factor 214

The social factor in the discount strategy 215

Social capital and egalitarianism 219

The dismissal of relationship marketing 221

Psychology, culture and the discount strategy 224

The view on discount 224

Exploitation of the cognitive dissonance 225

Life-style and satisfaction 227

The advent of the viral ambassador 228

The patronizing of customers 230

The rise and fall of patronizing 230

Increasing brand promiscuity 231

Simplicity prevails 233

How to save costs and increase perceived quality? 234

The main execution tactics 234

11 Finding the suitable technology 237

Finding technology 241

The innovator’s dilemma and the innovator’s solution 244

The choice of ‘discount’ technology 246

Proven technology 248

Scalability 248

Technology supporting the simple 249

Impact on back office system 249

Technological exuberance avoided 253

12 Value creation and value destruction 257

Strategy and war 258

Strategy revisited 264

The building blocks of the discount strategy model 265

The various execution processes 269

13 Epilogue 273

How to reflect thoroughly on the wider repercussions of successful discount business strategies? 273

Notes 279

Bibliography 287

Index 291

Michael Moesgaard Andersen is CEO of Andersen Advisory Group A/S. He and his team have provided strategy advice to numerous companies and public organizations around the world, and he is also directly involved in business development through his own venture capital company. He has worked as a lecturer at Copenhagen University and as external examiner at Copenhagen Business School, and is a frequent speaker at conferences. He is the author of numerous articles and two books on technology and management issues.

Flemming Poulfelt is Professor of Management and Strategy and Vice Dean at Copenhagen Business School, and Director of LOK Research Center. He is the author of many articles and books on the subjects of strategy, professional service firms, change management, knowledge management and management consulting. His books include The Contemporary Consultant (2004) and Managing Complexity and Change in SMEs (2006). He has served on numerous corporate boards, consults widely and is a frequent speaker at seminars and conferences.