18-The Picture of a Predator
Heico Corporation is a Predator. In our research, we have found that there are four types of low-end competitors. They differ from one another in the benefits they offer, compared to the industry-leading products, to either the user or the buyer of the product. We call the industry-leading companies and products Standard Leaders.
Heico Corporation is a Predator type low-end competitor. Compared to the industry Standard Leader product, it offers the same benefits to the user of the product with lower benefits to the buyer. Its products work the same but the company is not well known. Heico becomes a low-end competitor by way of the substantial discounts it offers on its products.
A bit more information about Heico and its industry. Heico supplies replacement parts to airlines, who use these parts to overhaul and maintain their airliners. Not everyone can make these parts. Before a company can make and sell these parts, the plans and prototypes for each product must be specifically approved by the FAA. Once approved, they then may be used as replacement parts. There are about 125,000 parts in the airline industry. Heico has approval from the FAA to produce 6,000 of those parts, and it adds 400 new parts each year. The company is highly profitable. For the last three years, profits have climbed by at least 14% annually. Heico is fast-growing as well. Sales are growing at the rate of 18% a year.
You might imagine that Heico is up against some relatively weak competition. Not so. Its main rivals are companies like General Electric and Pratt & Whitney. Heico controls only 2% of the total market for component replacement parts. The company gained that 2% by offering airlines prices that averaged 25 to 30% less than those offered by the largest competitors.
Heico is taking advantage of the price umbrella of the large name-brand parts makers. These companies price replacement parts very high in order to raise the profitability of their relationships with the airframe manufacturers. The big competitors hold these price umbrellas very high and this, in turn, has allowed Heico to offer discounts of 25 to 30%, despite enormous disadvantages in potential economies of scale.
The large parts manufacturers are in a Leader’s Trap, where they assume that their customers will stay loyal despite the low cost offerings of a low-end competitor. Over the long term this never works.
The Leader’s Trap is almost certainly going to be costly to the larger competitors because Heico has one very important wild card in its hand. Since 1997, the company has had a strategic alliance with Lufthansa, which is the world’s largest independent provider of engineering and maintenance services for aircraft components and jet engines. This is a very large customer endorsement of Heico and its products. With this Lufthansa implied assurance of Heico’s quality, the company’s 2% share will turn into 4, the 4 will turn into 8 and the 8 will continue to grow until the larger competitors decide that it is time to confront Heico. That confrontation will be bloody.
To learn more about low-end competitors and the way they operate in an industry, go to StrategyStreet.com and review Step 15 of the Basic Strategy Guide and the page Diagnose/Products and Services/Innovation for Customer Cost Reduction/Value Proposition.
The industry has not yet had to deal with Heico. It has continued with its Predator approach to the market. It proclaims its savings for its customers due to its aggressive pricing, providing quality products at cost-saving prices. Since this blog, Heico’s gross, operating and net margins remain both high and growing through 2021. It’s revenues have multiplied by five times since 2008, with ROEs ranging from 10 to 17%. Despite this record of successful and profitable growth, the company’s share remains small so the industry leaders have been able to ignore its aggressive prices.
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