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The McKinsey Quarterly 2004 Number 1

Ron Chan

When your competitor delivers more for less

When your competitor

delivers more

for less

Value players will probably challenge your company.
How will you respond?

Robert J. Frank, Jeffrey P. George,
and Laxman Narasimhan

Companies offering the powerful combination of low prices and

high quality are capturing the hearts and wallets of consumers in Europe and in the United States, where more than half of the population now shops weekly at mass merchants like Wal-Mart and Target, up from 25 percent in 1996. These and similar value players, such as Aldi, A SDA , Dell, E*Trade Financial, JetBlue Airways, Ryanair, and Southwest Airlines, are broadly transforming the way consumers of nearly every age and income purchase their groceries, apparel, airline tickets, financial services, and computers.

The market share gains of value-based players give their higher-priced rivals definite cause for alarm (Exhibit 1, on the next page). After years of near-exclusive sway over all but the most discount-minded consumers, many mainstream companies now face steep cost disadvantages and lack the product and service superiority that once set them apart from lowpriced competitors. This “shift to value” had its roots in the 1970 s and ’80 s, when Japanese automakers and consumer electronics manufacturers thrived by selling cheaper and initially inferior products that eventually became more reliable than those of the competition—and remained cheaper. Today, as value-driven companies in a growing number of industries move from competing solely on price to catching up on attributes such as quality, service, and convenience, many traditional players rightly feel threatened.

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Substantial opportunities remain for value players to continue seizing market share not only in industries where they already compete but also in additional ones.1 The pace and extent of the shift to value will vary by sector and circumstance, but the incursions of value-based companies demand the attention of management in every industry. Given their effect on national economic performance, policy makers and economists will want to pay heed as well.2

1

Value players don’t always grow at the expense of mainstream competitors. For example, a substantial...
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