Plus de la moitié des Français sont eurosceptiques et attribuent le déclin de leur pays et de leur niveau de vie (par rapport à celui de leurs parents) à l’excès d’« Europe ». Emmanuel Macron a profité paradoxalement de ce mécontentement pour conquérir le pouvoir, au nez et à la barbe des deux grands partis de gouvernement traditionnels. Il pose pourtant le diagnostic exactement inverse, puisqu’il attribue le désenchantement de ses compatriotes aux imperfections de la construction européenne, qu’il conviendrait de parachever (sans d’ailleurs démontrer comment une plus grande intégration européenne améliorerait la vie de ses concitoyens…).
Avec la fougue et l’idéalisme de la jeunesse, le Président français tente donc depuis septembre 2017 d’entraîner ses partenaires européens vers davantage d’harmonisation, de solidarité et de convergence ; autrement dit, davantage de centralisation et de fédéralisme. Après l’écoute bienveillante des premiers mois, les revers cependant s’accumulent. Depuis que le spectre du Frexit, dans le sillage du Brexit s’est éloigné, les masques tombent et les pays membres révèlent leur farouche volonté de défendre leur intérêt national en préservant le status quo.
Rappelons les derniers rappels à la dure réalité. Malgré les souhaits affichés d’Emmanuel Macron, les salaires des travailleurs détachés continueront à être soumis aux cotisations de leur pays d’origine ; il n’y aura pas de listes transnationales aux élections européennes. Le pacte de coalition entre les deux partis de gouvernement allemands ne prévoit aucun budget de l’Eurozone, aucun impôt européen le finançant, et encore moins de mutualisation des dettes. Le futur gouverneur de la BCE sera très probablement Jens Weidmann, l’actuel président de la Bundesbank, lequel mettra fin aux politiques monétaires ultra-accommodantes, impopulaires en Allemagne. Et comme si le message n’était pas assez clair, les ministres des finances de plusieurs pays européens (Irlande, Lettonie, Lithuanie, Pays-bas, Suède) se sont publiquement exprimés le 6 mars 2018 contre les ambitions réformatrices de la France.
A ce sombre panorama, s’ajoute la victoire des partis populistes et eurosceptiques en Italie, en Autriche et en République Tchèque. Le Royaume-Uni est de son côté, en train de démontrer que la participation à l’Union Européenne est réversible, sans que son économie ne s’effondre pour autant. Bref, Emmanuel Macron évolue à contre-courant et il est peu probable qu’il parvienne à faire adhérer les autres pays à sa grande vision européenne. La préservation de l’existant (la libre circulation des biens, des capitaux et des personnes, la monnaie commune, les mécanismes de soutien en cas de crise financière) semble être le seul objectif qui puisse raisonnablement faire consensus.
Tout porte ainsi à croire qu’Emmanuel Macron est en train de perdre son pari européen et qu’il a mal anticipé la vague de fond populiste, tout comme les résistances prévisibles de certains Etats égoïstes mais rationnels, qui n’ont aucun intérêt à mutualiser leurs richesses, tout en continuant à exploiter les efforts coopératifs des autres membres. Comment peut-il encore sauver la face, en ne donnant pas l’impression que son ingénuité été instrumentalisée par Bruxelles pour lui faire mener les réformes libérales qui sont demandées à la France depuis des années? Le président Macron ressemble à la Perrette de la fable, qui s’en allait guillerette vendre son lait au marché, se délectant en imagination de sa fortune future, avant de trébucher et et de voir ses doux rêves anéantis.
Véronique Nguyen, 7 mars 2018
At a time when value comes from combination, too much focus means narrow-mindedness and lost ground. Firms have to go beyond their efficiency comfort zone to discover and exploit hidden synergies between supposedly competing business models.
For decades, the key word in organizations has been Focus. Superior financial performance would derive from focus on one’s competitive advantage, focus on one’s objectives, focus on one’s clients. In a turbulent world, this is no longer true. Too much focus prevents from seeing the big picture and the new offerings that are likely to attract core and remote clients. The excess of focus has become a strategic handicap, leaving incumbent firms in the uncomfortable position of running desperately after new entrants.
The new business imperative is Combine! Competitive advantages come nowadays from the association of elements that are usually treated in isolation and perceived as unrelated or incompatible. With hindsight, we realize how smart it was from Google to develop and offer for free what was considered at the time as a distraction. Thanks to this clairvoyance, Android has become the Trojan horse that guarantees Google’s omnipresence on mobile devices. Non technology-based firms can also rejuvenate their core business by looking for other ways of fulfilling their clients’ needs.
Increased organizational agility have changed the foregone conclusion that firms had to focus on one business model and execute it brilliantly. Designing the right value chain in a company with multiple business models boils down to finding the right balance between differentiation and integration. The challenge is to manage independently what has to be differentiated and integrate properly what has to be pooled, in order to ensure scale and cost advantages that cannot be matched by pure players. The ability to manage this complexity becomes an additional source of competitive advantage, difficult to decipher and imitate.
All activities that have no impact on clients’ perception and may generate scale economies are pooled, which usually include IT, procurement, back office support. Conversely, specific brands and marketing are necessary in order to create distinct identities and territories, and minimize cannibalization. Depending on the industry, a deeper and more operational differentiation will be required in addition to the marketing specialization. In the automotive industry, manufacturing will be specific to each business model but components, platforms, engineering competences, design, and distribution network will be shared.
These operational synergies are indispensable to reach a price level unmatchable by new entrants and achieve a good profitability. Dacia, which was originally a Romanian car builder, was bought out by Renault in 1999 and relaunched in 2004 as its “entry brand”. In ten years, the Dacia brand has sold 3.5 million vehicles (mostly in Europe and in the emerging countries). The Kwid was then designed as the brand’s seventh and ultra low-cost vehicle, to be manufactured in India. It is the fifth best-selling vehicle in India, six months after its launch in 2016, thanks to its unrivalled price of 3.900 $.
Fig 1: The Kwid
Industries can be positioned according to the number of obvious and hidden synergies that can be exploited (see fig. 2). At one end of the spectrum, integration is maximal and differentiation minimal. All activities are shared, except sales and marketing. Development and production activities are pooled as there are no real differences in the products themselves. For instance, in the silicones industry, Dow Corning Chemicals responded to low price competitors by offering its mainstream offer at a 20% discount in a dedicated entity Xiameter. Xiameter’s clients are price sensitive professionals who don’t mind ordering online, in bulk quantities with no client service at all. Similarly in the European insurance industry, where traditional companies acquired all pure Internet low cost players, activities of contract conception and production, risk assessment and management, administration and billing, claim handling were merged, leaving just marketing and customer service as specialized units.
Fig 2: Managing synergies between competing business models
As more progress is made towards the right end of the continuum, there are fewer obvious commonalities but greater potential to take the lead over focused players. In the hotel industry, core activities such as, online distribution, online marketing, IT systems (reservation system), purchasing of commodities (energy, telephony, laundry), real-estate management skills can fruitfully be leveraged to combine business models and multiply market approaches.
In spite of the apparent diversity of their offering, many companies operate one major business model. There are six reasons why they should engender a degraded or improved version of themselves
Many corporations cook their ingredients always the same way. They operate one major business model, which prevents them from going along with the varying aspirations and purchasing propensity of their current and potential clients. Today’s highly competitive and disrupted environment requires a precision strategy, where core ingredients (assets, competences and capabilities) are assembled according to different business models, whether premium, low cost or mainstream.
There are six good reasons for adopting a differentiated business model, in addition to one’s core model.
- Fight differentiated rivals on equal footing, with the right weapons
There’s hardly any industry that is not under the threat of low-cost and/or premium new entrants. It may be Tesla in the automotive industry. But even in an industry long regarded as immune from intense price rivalry, such as cosmetics, leading firms are shaking in front of low-cost players, like the Italian Kiko or the German Essence, who are slashing prices by two or three. It is tempting to tweak one’s mainstream business model and degrade the value and price, when threatened by a low-cost player or do the opposite, when confronted by a premium rival. However these marginal modifications, which do not affect the core structure, turn out to be temporary patches with little impact. Supermarkets tried to resist attacks from either hard-discount retailers or premium food retailers by emulating some of their characteristics. But these efforts ended up far off the mark, with either a poor profitability or indifferent customers to the efforts of reviving the instore experience. The late CEO of Carrefour (for long the 2nd largest retailer in the world, now the 6th), Lars Olofsson, suffered from the two evils, with his failed policy of “reenchanting the hypermarket”.
Struggling simultaneously against low cost and premium competitors with a mainstream model is a lost battle. Doing the splits is impossible, when fighting on one front is already a challenge. Adaptation cannot be a relevant answer. Only diversification with alternative business models enables incumbent players to compete on equal terms with differentiated competitors. And if they don’t dare cannibalize themselves, they can expect others to do it.
This is what airlines have finally understood, after having lost 50% of their market share in Europe. IAG, formed in 2011 by the merger of British Airways and Iberia, runs its own low cost subsidiary, Vueling, which competes directly with EasyJet. Distorting the traditional model and the low-cost orthodoxy – with departures from major airports, connecting tickets, snacks served onboard, “business cabin” with additional legroom, power outlets, onboard wi-fi and an empty middle seat – Vueling has become a “premium low-cost” airline, like Germanwings in Germany or Jet Blue in the US. It is IAG’s most profitable business, with an EBIT margin of 10%.
- Preserve the mainstream brand
Cost-cutting plans, promotions, special offers damage the value delivered and the price positioning that firms have managed to establish over the years. To keep their flagship brand image, a few established players, like IAG with Vueling, have successfully introduced low-cost brands, which enable them to compete in the price war without damaging their flagship brands. The risk of tarnishing one’s image appears unfounded. Even though clients may eventually become aware that the economical brand is an offshoot of the legacy company, this relationship turns out to enhance much more the quality image of the low cost brand, which may become “premium low-cost”, than it undermines the status of the established name. The low-price segment offers indeed a variety of positioning: premium low-cost, “middle-cost”, ultra low-cost. And the same is true for premium.
- Capture all segments of the market with different business models.
The real underlying dimension which segments many markets is price. Having only one business model implies missing out on many potential clients. In the very competitive car rental industry, leading players address each major segment of the market with a different strategy and a specific business model. Avis, Hertz and Europcar are displayed as the flagship brand of their group. Endowed with the “gold” option, large corporations and higher professional classes, enjoy the widest range of services, the widest fleet, as well as premium loyalty programs. At the other end of the spectrum, leisure customers are buying a price from the low cost branches of these groups (Thrifty, Interent, Firefly,…). These clients don’t mind having little choice, or returning the vehicle at the starting point and booking and prepaying on the Internet. Running several business models concomitantly enable to use a second brand to contact a client and push an offer, when this client has not completed a booking on the website of the mainstream brand.
- Grow the market
Low cost players are expanding the size of the market by targeting customers who cannot afford the product and by increasing the rate of consumption for already existing clients. That’s why the cannibalization effect is moderate. Many Dacia clients were buying second-hand cars; many clients of low-cost airlines or railways would not have gone on holiday. Sky TV provides another example. The company returned to the path of growth with the launch of its low cost offer, Now TV, between 2 and 4 times cheaper than the traditional subscription. Management claims that 90% of customers of Now TV had never considered taking a paid subscription before.
- Leverage common resources
Hybrid strategies are all the more profitable and easy to execute as the same resources can be used to implement different business models. Strategic resources may take the form of physical assets (equipment, distribution network, after-sales network), information systems, competences (purchasing, marketing, engineering, manufacturing), capabilities (know-how, organizational routines and processes, managerial style). But even simple volume-effects on non-strategic resources make a difference, whether these scale effects come from already developed components that will be re-used, increased bargaining power, increased marketing visibility, increased plan utilization, utilization of neglected assets or back office capabilities.
- Achieve superior financial results
The superior financial results derive on the one hand from the additional volume that has been gained on competitors and on non-clients and on the other hand, from the superior return on capital of the differentiation formula. In the last three years, Vueling, with an average EBIT margin of 10%, accounted for only 8% of the total sales of IAG but more than 15% of its profit.
A more controversial source of savings comes from the differentiated spending patterns and compensation packages. Transavia, the low cost subsidiary of Air France-KLM, enjoys the same operating cost as the premium low-cost operator Easyjet. Its pilots and cabin crew are not only hired on less favorable terms than the parent company (around 20% overall), but they also work more. Its flight crew expenses represent 7% of its total costs, against 21% for Air France. On top of these savings, Transavia does not have to bear the cost of the Air France ground handling staff and may therefore subcontract this activity. Thus its handling fees account for only 5% of its costs, against 24% for Air France. In the same vein, it is estimated that Eurowings, the low cost subsidiary of Lufthansa, benefits from operating expenses 40% lower than those of Lufthansa.
Most Americans have a faulty strategic vision. Instead of seeing the three primary strategic colors, they only perceive two of them: premium and cost leadership. Differentiation is mistaken with premium and low cost is confused with cost-volume leadership.
There is a general consensus to consider that there are two generic strategies: differentiation and cost-volume leadership. Yet most Americans perceive only one side of differentiation and mistake the other side with cost-volume leadership. Differentiation is often equated with its upward form: premium; and its downward form, low-cost, is usually confused with cost-volume. The distinction between the two strategies is however easy to make. A cost-volume strategy provides the benchmark offer at a lower price (eg. Walmart), whereas a low cost strategy produces a degraded version of the benchmark offer, stripped of all dispensable features (eg. Aldi).
Contemplating differentiation, the low cost option is generally disregarded in comparison to the premium alternative. Most managers have a premium bias and an irrepressible tendency to offer additional value to clients. Trading up is the quasi-systematic answer to the well-known “commodity trap”: more quality, more functionalities, more customer intimacy, more related services, more ergonomics, more flattering branding, better customer experiences, more integrated solutions…., even though a large number of customers are not willing to pay for it.
Many companies fight this faltering willingness to pay by boosting their sales & marketing efforts and strengthening their innovation department. They exhaust themselves trying to justify the price difference and educating their customers. This noble endeavor is bound to fail with clients who just want to have their basic needs satisfied. Low cost business models go against this trend for ever more sophistication, convenience and speed. They attract many consumers who accept less comfort and less ego-massaging in exchange for drastic price reductions.
The magic of the downward form of differentiation
For differentiation to be viable, whether upward or downward, the following “golden rule” has to be respected. The rationale behind this “golden rule” is that if you want to divert customers from the mainstream offer, the increase in value has to be superior to the price increment; otherwise they would have no interest in switching to premium. Likewise, to attract clients in the case of low cost, the decrease in value, measured in absolute terms, has to be inferior to the decrease in price. Then, if you don’t want to compromise your profitability, costs have to vary less than prices in the case of premium and more than prices in the case of low-cost.
|Differentiation Golden Rule
∆ Value > ∆ Price > ∆ Costs
where ∆ is the difference between the differentiated offer and the reference (mainstream) Offer
Ex : upward differentiation (premium): +50 > + 30> +20
Ex : downward differentiation (low cost): – 20> -45 > -55
The paradox is that low prices for clients in a low-cost business model, doesn’t imply low profitability for companies. That’s why low-cost strategies make up an unorthodox win-win model. Customers do give up part of the value that comes with the reference offer but the sacrifice they make is largely offset by the money they save. On the other hand, bottom lines are not penalized by the low prices, as the streamlined value proposition and architecture are driving the costs down, and even further than the price reduction. Our research shows that low cost strategies that comply with the golden rule are creating more value for their clients and themselves than benchmark offers. The short-haul airline industry provides a good illustration of the phenomenon (Fig.1).
Fig 1: the example of the short-haul airline industry
The financials of low-cost players are upgraded (see fig. 2 for an overview of the average profitability of the different business models run by the Accor Group in the hotel industry, or table 1 for financials in the airline industry). It comes not only from the lower cost base, but also from the additional revenues and the improved assets turnover. Clients are attracted by very cheap prices but are pushed to buy additional features, services or goods. It will cost you only 29 $ to fly from New York to Florida but you will have to add 35$ for a pre-booked hand luggage. Ancillary revenues make up 40% of the sales of Spirit Airlines and 25% of the European leader Ryan Air. Low-cost financials are also characterized by an enhanced assets turnover, which combined with less assets requirements, results in a better return on capital employed. Occupancy rates are indeed higher in low-cost hotels (80% vs 65%) or car rentals (70% vs 60%); number of daily rotations per plane is higher (planes fly 11 hours a day vs 8 hours), sales per square meter are higher in hard-discount retail….
|Company||Operating margin||Return on capital
|Low Cost : South West Airlines||21%||10%|
|Low Cost : Ryan Air||22%||14%|
Table1: 2015 Financials of low-cost operators vs legacy companies (Source Reuters)
How to design a low-cost business model
Becoming low cost involves the restructuring the value architecture, which can be achieved through several routes. The first route is the self-limitation that comes directly from the purification and simplification of the value proposition. The offering is not only simpler but entails less comfort for the client, which enables the removal of entire steps in the value chain, such as distribution through retail outlets or intermediaries, customer support, various customer services (even basic ones like exchange or refund), design and implementation of nice displays, marketing and sales effort (the price speaks for itself and is disseminated via journalists and word-of-mouth). The offer is a “take it or leave it” offer. So no adjustment, variation or customization of the core offer is available.
The second route derives from this extreme standardization and entails massive volume effects. In a self-perpetuating virtuous circle, the low prices attract customers, which in turn intensify the scale effects. The third lever is the transfer to clients or to automated systems of some of the tasks usually carried out by employees in the company. This may take the form of administrative tasks (booking, payment, printing), customer service which becomes self-help, additional transportation efforts borne by the clients, co-production of the service (like clients washing their own hair). Finally, the fourth level of cost reduction is the higher productivity of the workforce, whether they are less paid, more versatile, putting in more hours or more autonomous with less management.
Low cost offerings create so much customer and financial value that its path can no longer be overlooked by companies aspiring to reinvent themselves.
|SUMMARY: What is a low cost business model?
A simple offering, streamlined of any superfluous attributes, focused on meeting basic needs
Prices which stand out from competition
A lower level of comfort for clients, who have to sacrifice convenience, but paradoxically nice surprises on certain dimensions (processing speed, robustness,…)
Self-limitation : removal of some costly steps in the value chain (a direct consequence of the elimination of value attributes), stark reduction in variety and complexity, no customization, refusal to handle special cases or to address certain groups of « privileged“ customers, limited innovation, re-use of pre-existing components,
Automation & co-production by the customer
More productive, more versatile and autonomous staff
Improved profitability: the dramatic cost reduction is not fully passed on to customers
Development of ancillary revenues. Some of the frills of the reference offer are proposed as a chargeable option.
Less investment, better assets turnover. Hence better return on capital employed
One pillar of the traditional strategic thinking is falling apart. Decision-makers who still adhere to the old paradigm will be losing valuable growth opportunities.
Since Porter’s seminal work in the 80’s, firms are supposed to choose sides: either differentiation or cost leadership. If they fail to do, they may fall into the trap of being “stuck in the middle” with no clear competitive advantage. Companies trying to combine the two generic strategies are expected to underperform their focused peers for three reasons. First, being average on several value dimensions, they won’t attract clients. Secondly, they will suffer from higher costs because of the inconsistency of their value chain. Finally, their lack of strategic clarity will result in internal confusion and excessive complexity.
That counter-examples exist is not a new insight. Samsung semiconductors, Ikea, Zara…, are the living proof that firms can enjoy a dual competitive advantage and reconcile differentiation and cost. Nevertheless these cases have not invalidated the general belief that firms belong to mutually exclusive strategic groups. Firms may deviate from the core strategic pattern of their group, but within the limits of their initial choice (cost leadership or differentiation). For instance, Zara may give more value for money than Gap, but cannot vie with Gucci or Prada.
We have however reached a moment where exceptions have accumulated to the point that they are questioning the relevance and the simplicity of Porter’s framework. In many industries, major players are having it both ways and are running supposedly incompatible business models. It used to be impossible to be present at both ends of the market and disprove the fate of one’s initial positioning. Stelios Haji-Ioannou, the founder of easyJet used to claim vigorously: “You don’t become low-cost, you are born low-cost.” His assertion was based on the failures of many airlines in the 90’s and early 2000s that had tried to become low-cost (Delta with Song, United with Ted, British Airways with Go Fly, KLM with Buzz, SAS with Snowflake). But what may have been true 15 years ago is no longer valid. The world reference for premium service Singapore Airlines has thriving Low Cost branches with Scoot and Tiger Air.
Many pioneering companies are nowadays simultaneously pursuing cost and differentiation, sometimes without the clients’ knowledge, thanks to a multiple branding. Hybrid value chains have emerged, with activities being shared and others being redundant or specific. Far from creating inefficiencies in terms of unnecessary costs or insufficient value, these hybrid value chains have turned out to be an indispensable source of competitiveness and growth. Below is a non-exhaustive list of companies that are running successfully theoretically irreconcilable strategies and benefitting from unconventional synergies. Players that are ignoring the new paradigm are doing so at their peril. They will miss out on numerous potential customers and sources of savings. There are too many opportunity costs to be stuck with one business model!
Fig. 1: Based on Porter’s competitive advantage, there are three main business models: volume, premium, low-cost. Four combinations of these business models can be found, with one of the combination covering the full range of possible strategies, as exemplified by Renault-Nissan (first automobile maker in the world) or Accor (6th largest hotel group in the world)
|Industry||Company||Low cost Brand||Mainstream brand||Premium brand|
|Air transport||SIA||Tiger Air
|IAG||Vueling||British Airways & Iberia|
|Pay TV||Sky TV||NOW TV||Sky TV|
|Silicon||Dow Corning||Xiameter||Dow Corning|
|Food retail||Casino||Leader Price||Geant Casino||Monoprix|
|Eyewear||Afflelou||Optical Discount||Alain Afflelou|
|Fitness centers||Moving||Fitness Park||Moving Express||Club Moving|
Table 1: some industries where companies run simultaneously supposedly incompatible business models and combine supposedly incongruous competitive advantages