Low-End Competitor Exposes Fundamental Strategic Errors of the Leaders

Low-end competitors don’t think like industry leaders. As a result, they often blow big holes in the leader’s plans.

For twenty-five years, from the early 70s until the late 90s, the color television manufacturing market was one of the worst places on Earth to compete. Those companies who did survive, and there weren’t many, became hard-bitten competitors with no illusions about the inevitability of success of even the largest companies. The two largest U.S. competitors, RCA and Zenith, are now nearly-forgotten names. GE was another titan victim of the inexorable pressure of intense price-based competition.

But then something magic happened to the industry, the advent of flat panel television. The prices for these televisions were ten to twenty times that of the average consumer television before the introduction of flat panels. The industry survivors got well in a hurry. They went from poorly performing companies to stock market stars. They could sell more than they could produce. Profits were high and the future seemed bright.

The best of the industry leaders in the flat panel business included Philips Electronics, Sony and Samsung. These companies built their business model in the world of a component parts shortage by creating their own proprietary technologies and by manufacturing many of their key components in their own factories.

These leaders held on to the proprietary business model too long. The demand for these flat panel televisions and the components that go into them was so high that independent manufacturers entered the market. Soon these independents had created economies of scale that were actually better than those enjoyed by the current industry leaders.

Now, there emerges another threat to the leaders’ business model. This time it is a market threat in the name of Vizio. This company entered the market at the low end, producing basic products for prices often one-third or more below those of the industry leaders. In a very short period of time, Vizio went from barely existing to control of 12.4% of the LCD TVs shipped in the domestic market. Sony had 12.5% and Samsung had 14.2% at the same time.

Where did Vizio find its market? At the low end of the distribution channel. The company started with Costco, who gave it its real foot-hold in the market. On the basis of that success, Vizio expanded its distribution into other low-end retailers, such as Wal-Mart’s Sam’s Club and BJ Wholesale Club.

The result has devastated the new-found wealth of the large TV manufacturers. Flat panel TV average prices fell 24% during 2007 and the large manufacturers are seeing trouble in their profit margins. But Vizio continues to grow.

What did the industry leaders do wrong? There are at least five lessons here. First, they let economies of scale get away from them by watching independent manufacturing companies gain better economies of scale. Second, the leaders then failed to use those lower cost component companies to source some or all of their needs. Third, they priced their products for the short term, rather than the long term. They provided an umbrella on pricing that allowed low-end competitors, to under-price them by more than 25%. They have sustained the umbrella over these fast-expanding competitors, who continue to use those profits to build even stronger businesses to compete with the leaders. Fourth was a price point problem. The industry leaders paid little attention to the smaller versions of the LCD markets. Because the leaders short-changed the low price points of the market, they also encouraged companies like Vizio. Fifth, the leaders served the low-end distribution channels poorly. Vizio has got of its traction from channels of distribution who emphasized the low end of the market. Vizio and their ilk could never have succeeded to this extent were it not for the fact that the industry leaders served those channels of the market poorly.

Now the industry leaders are paying the price with falling margins. The battle to beat back the Vizio will be much more difficult now that the company has become so large.

We have seen a leading company make these same five missteps before. Compaq trod this pathway in the very early 90s. They allowed the PC “clone” manufacturers to use the Vizio strategy to take share. Eventually, Compaq dropped its prices to those of the “clones” and revamped its management of costs. But too late. Dell was one of the “clones.”

For more information about the types of low-end competitors and how to combat them, see “Turmoil Below: Confronting Low-End Competitors” on StrategyStreet.com in Tools/Perspectives.