Benefits of Intense Competition: Lower Prices and Better Products

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No segment of our economy has been under more intense pressure than the manufacturing sector. Lower labor costs in many parts of the international economy have forced manufactured product prices down and shifted manufacturing jobs out of the United States. Competition has indeed been intense.

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Does the Withdrawal of Capacity Help?

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As industry prices fall, and companies’ fortunes decline with the resultant squeeze on their margins, some companies, especially the leaders, seek to withdraw capacity from the market. The leading companies expect the capacity withdrawal to do two things: redress the imbalance between capacity and demand; and raise prices to more attractive levels because of this better balance. In practice, the withdrawal of capacity often fails to achieve either of these objectives. Whenever a leader in an industry reduces its capacity to force price increases, it must consider how competitors will respond. In many, if not…

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Nestlé’s Cost Reduction in the Coffee Business

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Nestle is the world-wide leader in the coffee business. They offer coffees at virtually all price points. They invented instant coffee in the 1930s. After the buffets of the commodity markets over the last few years, the company has created a global push to reduce its costs and to increase the quantity and quality of the coffee it buys. We have found four generic approaches to reducing costs. First, reduce the rate of cost of a cost input. Second, reduce the cost inputs that do not produce output. Third, reduce unique activities and components in…

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Cost Reduction by Redesigning the Product

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Over the last several years, we have studied many examples of cost reduction initiatives to improve productivity and create economies of scale. In simplest terms, there are four actions that improve productivity and economies of scale. First, reduce the rate of cost you pay for an input. Second, reduce the inputs that do not produce output. Third, reduce unique activities or components in products and processes by redesigning the products and processes. Fourth, spread fixed cost activities over new product output. The cellular telephone carriers are introducing measures to reduce their costs by redesigning the…

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But Can You Control Other Entrants?

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The United Autoworkers (UAW) is on a new campaign. The union plans to organize workers in hither-to non-union foreign-owned automobile plants in the United States. This campaign may or may not work, but in the long run it will prove futile unless the union can compete in the international market, against all international auto workers. There are 575,000 autoworkers in the U.S. Nearly 20% work for foreign-owned plants. All of these plants are non-union. The foreign-owned plants were intentionally placed in right-to-work areas, many in the South. The UAW is likely to have some difficulty…

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Constrictions in Components Supply Support Higher Prices

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Years ago we were doing some work in the roofing business. In one study, we were working on the asphalt shingle roofing manufacturing business. At the time, this was a terrible business. Returns were low, growth rates were modest, at best, and there was a good deal of overcapacity in the industry. Then the industry caught a break. A shortage in asphalt developed. This shortage of asphalt rolled through the asphalt shingle plants and restricted their output. Immediately, prices jumped, returns became attractive and industry participants breathed a sigh of relief. Unfortunately, this asphalt shortage…

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Direct Edge – A Transformer Next Leader Product

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A Next Leader competitor is in an extremely fortunate position. A Next Leader is a competitor or product that offers much better than industry standard performance for a low price to a specific subset of industry customers. While offering better benefits to some customers, it may reduce benefits for others. But all Next Leaders offer low prices. The Next Leader can do this because it has a very low cost structure. (See “Video #22: Definition of Next Leaders” on StrategyStreet.com.) Next Leaders do not appear in many industries. When they do appear, they can change…

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Costs – The Problem with Weak Constraints

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Here are two random observations of the results that any manager can expect to face when there is little to no constraint on the level of costs in an organization. The first comes from the Heritage Foundation. This foundation analyzed the percentage of jobs gained or lost since January of 2008 through July 2010, a time of recession. The foundation measured job growth in the federal government, state government, local government and the private sector. The private sector was under extreme constraints as revenues flattened or shrank. This sector lost 6.8% of its jobs. Local…

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I Guess it Takes Bankruptcy…

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In our previous blog (see Here), we described the resuscitation of the comatose manufacturing employment due to renewed flexibility in many union shops, such as GM. I guess it takes bankruptcy to get attitudes to change. Look at American Airlines, for an example. Over the last several years, its big airline competitors have been getting bigger. United and Continental combined, as did Delta and Northwest. U.S. Airways merged and Southwest has just purchased Air Tran. Through it all, American stood largely on the sidelines. Most of the other competitors had a real advantage. They went…

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Green Shoots in Attitudes and Jobs

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Here is something that may surprise you. We are now gaining manufacturing jobs in the U.S. Manufacturing employment has fallen every year since 1998, until 2010. Since the beginning of 2010, there has been a 1.6% gain in manufacturing jobs. That’s twice the pace of the growth in other private sector jobs. The unemployment rate for the manufacturing has improved from 13% in December of 2009 to 9.5% in August of 2010. That’s a better performance than that of the overall labor force. These gains have come primarily in four industries: automobiles, fabricated metals, primary…

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