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Management article
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Reference no. SMR45411
Authors: Donald V Potter
Published by: MIT Sloan School of Management
Published in: "MIT Sloan Management Review", 2004
Length: 8 pages

Abstract

Every industry leader lives in fear of the low-end competitor - a company offering much lower prices for a seemingly similar product. The vast majority of such low-end companies fall into one of four types: strippers, predators, reformers and transformers. Each of those is defined by the functionality of product and the convenience of purchase. Strippers, for instance, typically enter a market with a bare-bones offering, reduced in function and usually in convenience. Industry leaders have significant advantages for combating low-end competition, but they often hesitate because they''re afraid their actions will adversely affect their current profit margins. The answer, then, is to find the response that is most likely to restore market calm in the least disruptive way. An industry leader could choose to ride out the challenge by ignoring, blocking or acquiring the low-end competitor. Or it could decide to strengthen its own value proposition by adding new price points, increasing its level of benefits or dropping its prices. Such tactics can be effective in the short term, but the industry leader also needs to consider strategic retreat, particularly when certain conditions make future low-end challenges inevitable.

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Abstract

Every industry leader lives in fear of the low-end competitor - a company offering much lower prices for a seemingly similar product. The vast majority of such low-end companies fall into one of four types: strippers, predators, reformers and transformers. Each of those is defined by the functionality of product and the convenience of purchase. Strippers, for instance, typically enter a market with a bare-bones offering, reduced in function and usually in convenience. Industry leaders have significant advantages for combating low-end competition, but they often hesitate because they''re afraid their actions will adversely affect their current profit margins. The answer, then, is to find the response that is most likely to restore market calm in the least disruptive way. An industry leader could choose to ride out the challenge by ignoring, blocking or acquiring the low-end competitor. Or it could decide to strengthen its own value proposition by adding new price points, increasing its level of benefits or dropping its prices. Such tactics can be effective in the short term, but the industry leader also needs to consider strategic retreat, particularly when certain conditions make future low-end challenges inevitable.

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