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3 The Essence of Competition
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THE MYTH: Being competitive means cutting costs.
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This myth came as part and parcel to the myths discussed in one and two above. It is based on an overly simplistic understanding of supply and demand economics. According to this incomplete understanding, if you could lower the price of your products and services, you could also attract more customers. The thinking was that the increased volume sold would translate into higher profits, though unit profit will actually go down. (The Problem with Price Cutting)
The whole strategy pivots on being able to sell more products or services, for less money than your competitors can. |
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Of course, some companies feel compelled to go a little further. In an attempt to increase their profit margins while keeping prices down, these companies are known to cut a few corners. The main thrust of this idea is now a matter of giving customers as little as is needed in order to get them to buy. The main draw for this company’s customers is low sticker price. |
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But by adopting this strategy, a company suffers four drastic consequences. For starters, this company’s products and services will only appeal to customers who purchase according to sticker price. While the price shoppers will not care if some corners are cut, they will not be loyal either. By competing in terms of price, a company can attract new customers for the one-off sale, but it can never create or maintain customer loyalty. If these customers find a better price elsewhere, there will be nothing to stop them from going there to spend. |
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Secondly, the low-profit/ high-volume strategy puts more stress on your personnel and equipment, at the same time that you have less money to spend on development and maintenance. In essence, this company is feeding off of itself, in order to lower prices (in biological terms, a catabolic process). Business people need to ask if this self-destructive corporate behaviour is actually worth it, when it does not result in customer loyalty anyway. |
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Third, in many industries, competition comes from outside our borders. If these competitors are from countries with no employment standards, environmental controls or other restraints on business activity, then the playing field is tipped in their favor. When companies compete in terms of price, they open the door to these competitors and show them the way in. All these foreign competitors have to do is exploit their lower cost structure to drive the price war through the floor. This is why few companies in the developed world can compete with companies in the developing world in terms of price. |
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The fourth and most serious pitfall of this myth is what it does to the employment relationship. When companies embark on their cost-cutting price war, they invariably urge their employees to work faster and produce greater quantity. This sends a dangerous message. (Communicating for Organizational Change) What happens is quality goes out the window. In an attempt to give their bosses what they asked for, employees will pass sub-standard products and services through the process, in order to avoid being the target for another kind of cut. Given their family responsibilities and financial obligations, most employees will do whatever it takes to avoid being pegged for the problems that always occur when things are sped up. As a result, this company may succeed at producing greater quantity, but the price they pay is lower quality, and reduced employee pride. (The Importance of Employee Pride and Commitment) |
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