Industry Evolution Forces Cost Management

The evolution of a market often brings new consumers who prefer, or can afford, only low-priced products. In order to reach these consumers, a company must reduce its costs while it grows.

The British confectionery firm Cadbury dominates the Indian chocolate market. It has 70% market share in the chocolate market and a 30% share of the confectionery market in India. The company began operations in India in 1947. They imported its chocolate bars and sold them to the very wealthy. Later, it developed its own factories in India.

As the Indian market develops, more consumers and potential consumers enter the chocolate market. The growth in the market comes with consumers who live outside the major cities and who have very low incomes. In order to reach these consumers, Cadbury has to offer products that it can sell at very low prices. (See Diagnose/Products and Services/Innovation For Customer Cost Reduction/Four Price Points on StrategyStreet.com.) To meet these new consumers, the company has developed a product called Cadbury Dairy Milk Shots. These are small chocolate balls that are covered with a sugar shell. A package of two of these balls sells for about $.04. But these low-priced products still drive growth.

But Cadbury can not reach these new consumers with very low-priced products without containing its cost structure. The evolution of the market forces Cadbury to reduce its costs as it grows. Over the last few years, the company has reduced its workforce, moved factory locations from high-cost to low-cost areas, and improved the cost effectiveness of its supply chain. This is all on the base of a company that was profitable to begin with. (See Diagnose/Costs/Measuring Current Economies of Scale on StrategyStreet.com.)

New Product in a Fast Growing Industry: Verizon Cloud Computing

Verizon Communications recently announced that it was entering the market for cloud computing. Cloud computing is a service that allows a business to increase its computing power by using the internet, network bandwidth, on demand, from facilities operated by companies like Verizon. This market is fast-growing because it allows businesses to save the costs of building and managing their own computer facilities. Let’s use the Customer Buying Hierarchy to evaluate the prospect for Verizon’s success.

The Customer Buying Hierarchy (see “Video 27: Full Description of How the Customer Buying Hierarchy Works” on StrategyStreet.com) holds that customers buy a product using four categories of evaluation: Function, Reliability, Convenience and Price. Function (see “Video 13: Definition of Function” on StrategyStreet.com) refers to the features of the product that affect how it is used. Reliability (see “Video 14: Definition of Reliability” on StrategyStreet.com) refers to the benefits of the product that assure the customer that it works and will continue to work. Convenience (see “Video 15: Definition of Convenience” on StrategyStreet.com) refers to the ease with which the customer may find and purchase the product. Price is the cash cost the customer pays for the product.

Verizon offers a valuable Function advantage. Cloud computing is a service that today is targeted at large corporations. These corporations use several different types of computers and software applications. Verizon has made a Function innovation leap by offering customers options in setting up their cloud service that would include being able to use various types of computer servers, depending on the software applications the business needed to use. But this is early in the game, so many Function innovations have yet to be introduced.

Verizon, along with its telecom competitor AT&T, does have some real Reliability advantages. These companies have spent years managing network services, data infrastructure and transfer. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.) This gives them real credibility with corporate customers. Verizon and AT&T also have a significant Convenience advantage in their global reach. (See the Perspective, “Convenience: Much Tougher Than it Looks” on StrategyStreet.com.) These two phone companies are able to offer cloud services to overseas divisions of companies.

Pricing is the great unknown. Low prices can move a lot of share in a fast-growing market. Neither Verizon nor AT&T are what you would consider sharp pricing companies in their other businesses. It is unlikely, then, that they will be aggressive price competitors. On the other hand, Amazon also plans to enter this marketplace. Amazon has learned to compete aggressively on Price and may be the eventually price-setter in the market.

This is very early in the development of the cloud computing market. Unique Function advantages may emerge and remain unique due to legal barriers. The early Reliability and Convenience advantages strongly favor Verizon and AT&T with their technical competence, corporate reputations, and global reach. One, or both of them, should be very successful in cloud computing, assuming that they don’t get tripped up with high prices.