Achieving Competitive Advantage: Strategies for Balancing Quality and Cost Efficiency
By Richa Singh, CFO at Pernod Ricard
Consumers want affordable quality products and services. Shareholders want growth and profitability. Winning companies strike the right balance by delivering sustained affordable quality while achieving profitability year after year. These companies are clear in their vision and engineer their organization, systems, and manufacturing and commercial processes to align with the type of product and service portfolio they want to play in for the medium to long term.
An organization aiming to compete in the lowest cost segment versus one that provides premium quality services or products must set up its organization, processes, and ecosystem very differently. For example, compare Go Air with Vistara, or Action Shoes with Nike.
Vision and Strategy Alignment
A winning organization, having decided on its vision and strategy, will continuously benchmark and re-engineer its:
Organization and organizational design
Marketing strategy and budgets
Product and business costs
Pricing strategy
This ensures the organization remains relevant with changing times and consumer needs. Cost competitiveness arises from balancing these pillars and staying agile in the market environment.
Organizational Design
Having the right people, competitively paid and in the right roles, is crucial for delivering the company’s vision. It's essential to maintain the right number of employees to keep the organization agile and aligned with its product and service delivery goals. If trade margins have increased over the years due to the growth of organized trade, it might be necessary to reassess the number of people or sales offices the company operates.
Marketing Strategy and Budgets
Gone are the days of generalized offerings and ubiquitous presence. Micro solutions and careful planning of the product, place, and price mix can offer a sustained competitive advantage.
Customer Segmentation: Tailoring pricing and product offerings to different customer segments based on their preferences, purchasing behavior, and willingness to pay can optimize revenue generation. Understanding and meeting the specific needs of diverse customer groups can drive profitability.
Data-Driven Insights: Leveraging data analytics and market research to understand consumer behavior, trends, and preferences enables informed decisions about pricing and product adjustments. Data-driven insights help optimize strategies for long-term profitability.
Feedback and Adaptation: Listening to customer feedback and adapting pricing and product strategies based on their input fosters loyalty and satisfaction. Continuous improvement and responsiveness to changing consumer needs help businesses stay relevant and profitable over time.
Product and Business Costs
Companies often face a variety of cost-related challenges that impact their cost of goods and services and profitability. Some common cost challenges include:
Rising Costs of Materials and Manpower: Sudden spikes in commodities or unexpected new taxes can disrupt previously effective cost strategies. What has worked so far may not offer sustained solutions. If forward hedges and negotiations are not yielding the needed results, it may be time to consider vertical integration to capture more synergies of scale.
Cost of Growth and Complexity: Expanding geographies, customer channels, or portfolios of brands and SKUs can increase costs and complexity. These inefficiencies may be overlooked in the initial years when incremental growth makes the P&L look good, but if not corrected, they can soon impact profitability.
Pricing Strategy
Dynamic Pricing: Implementing dynamic pricing strategies helps businesses respond to changes in demand, competition, and market conditions. Pricing adjustments based on factors like seasonality, consumer behavior, and competitor pricing can maximize revenue and profitability. For example, airlines raise prices on busy days, and beverages are sold at higher prices in select channels for convenience and experience.
Value-Based Pricing or Cost-Lead Pricing: Aligning prices with the perceived value of products or services ensures customers are willing to pay a premium for what they receive. Regularly evaluating and adjusting pricing based on value propositions can enhance profitability in the long run. This approach is crucial in categories with low price elasticity, such as hard-boiled candies or basic hygiene products, where consumers may reduce consumption or downgrade to a cheaper product if prices increase. In such cases, managing product design and costs to maintain market share is important, as is expanding the portfolio to capture quality-seeking consumers.
By continuously assessing and fine-tuning pricing strategies and product offerings in response to shifting consumer needs and market dynamics, businesses can position themselves for long-term success and profitability.
Conclusion
Competitive cost advantage arises from actively managing portfolio choices, pricing, and the cost of goods to maintain a healthy gross margin. Ensuring the organization is structurally positioned for competitive advantage requires strong talent, agile structures, and well-planned and deployed marketing budgets. By striking the right balance between delivering affordable quality and achieving profitability, companies can ensure sustained success in a competitive business environment.