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<strong>chapter</strong> 5 · a concept of the future 145some nuance that framework, 72 while others suggest that companies which tryto combine low cost and differentiation do not necessarily end up ‘stuck in themiddle’. 73 Empirical and anecdotal evidence suggest that companies can exerciseboth strategies simultaneously without ending up in the cursed stuck in the middleplaying field. This is the essential axiom of the Total Quality Movement: qualityand efficiency can go together. Furthermore, efficiency and differentiationare not independent alternatives but are related in time. Most companies firstdifferentiate and then aim at internal efficiency. In many industries there is anevolution from product innovation (differentiation) to process innovation (efficiency).74The search for efficiency limits strategic flexibility and it is questionablewhether investments which stimulate lowest costs can be recouped in marketswhere you need to innovate quickly. Product innovation and cost efficiency seldomgo together. Also, the sustainability of cost leadership is often perceived tobe limited. ‘If you look for the curve of the lowest cost, be prepared to live like ahamster: run, run, run!’ warns Michael Porter. 75 Why is this so? Firstly, technologicalinnovation may allow competitors to weaken the low cost strategy of thecompany. Secondly, competences associated with a low cost strategy, such asFigure 5.9 · Price Erosion of Consumer Electronics in the uk Market (Source of Data: gfk)© rudy moenaert, henry robben, peter gouw, lannoocampus • marketing strategy & organization
146 marketing strategy & organization© rudy moenaert, henry robben, peter gouw, lannoocampus • marketing strategy & organizationefficiently allocating resources, may find their way to other companies throughpersonnel mobility. Lopez has shown this perfectly when transferring fromGeneral Motors to Volkswagen. Thirdly, the internationalisation of markets,the advance of international distribution channels and currency fluctuationscan significantly erode cost leadership.Marketers should not only look for efficiency on the supply side. A companyprospers as a result of healthy customers. It is not good for a company to give into the umpteenth request of a price-driven customer. It takes courage, however,to leave customers like gm Europe and Fiat, and focus on premium segments,as Michelin did. 76 Companies must educate their customers about value andprice. Price-driven customers will experience that low prices may have a high,hidden price tag: worse logistics, less reliable products or feeble after-sales service.A value chain is as strong as the weakest link. For instance, industrial customerscannot afford to infect a healthy value chain by continuously ‘excelling’in weaknesses through faulty sourcing. 77The current Albert Heijn strategy in The Netherlands raises many questions.This company started a price war to regain the market share it had lost to thediscounters. As in other sectors, 78 this price war has decimated profits, reducedinvestments in innovations and made suppliers nervous. Even the shoppersare fed up with it; they visit less frequently and buy less. Does this misery bringAlbert Heijn any joy? We doubt it. Should the fact that the parent companyseeks to camouflage revenue details under the heading of Retail The Netherlandsbe seen as the writing on the wall? Is Ahold – the holding company – turninginto A Hold Up? A price war is often as dangerous as a barbeque among thehay stacks.The profit of a company is extremely sensitive to the price. Price is the onlymarketing mix variable which generates a direct revenue. As such, it is anincredibly important lever of a firm’s profitability. A study of the income statementsof 1,200 global companies showed that, on average, fixed costs amountedto 24.5% of sales revenues, variable costs to 66.4% and operational profit tojust 9.1%. A simple simulation leads to some staggering conclusions:• A 1% sales volume increase will raise operational profits by 3.7%;• Reducing fixed costs by 1% improves operational profits by 2.7%;• Lowering variables costs by 1% boosts operational profits by 7.3%;• A 1% price increase improves operational profits by 11%. 79The cost structure of many companies will not be as ‘lean and mean’ as in theseglobal organisations. In fact, in many industrialised nations average after-taxprofits are ‘dangerously close to zero’. 80 Consequently, a 1% price increase will
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