Learn cost cutting from low-cost businesses

N°217b – Synopsis (8p.) – Economic Performance
Learn cost cutting from low-cost businesses
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Low-cost is often assimilated with cheap prices and cheap quality to match. Wrongly so! This dramatically innovative business model has generated major savings. Could low-cost offer new inspiration to improve the profitability of your organization?

Many executives see low cost as a world apart, in which cheap products and services are aimed at specific population segments which do not include their customers. Newcomers arriving on the market with this strategy are often treated with a combination of disdain and skepticism by traditional players, who are convinced that the low-cost approach can’t possibly work in the long run.

 Yet, this vision is simplistic. The low-cost sector is effectively based on a very different, but sustainably profitable business model, not on social dumping or artificially reduced prices. This is shown by the lasting success of airlines such as Southwest Airlines, Easyjet and Ryanair, as well as hard discount retail chains, not to mention Dell on the computer equipment market for the past two decades.

Low-cost players thus deserve to be taken seriously and studied closely. To begin with, the competitive threat they represent must not be taken lightly. The sudden emergence of low-cost players often shakes up the market, because traditional incumbents are rarely able to adapt to these new practices. Most long-haul airlines, for example, made the strategic decision to adopt a hub-and-spoke infrastructure several decades ago. Because of the heavy investments required to build suitable connection platforms, the incumbents cannot easily shift gears to align themselves with low-cost newcomers, who have slashed prices with a point-to-point short-haul flight model. In addition, low-cost players represent more than a competitive threat; they can also serve as a source of inspiration. These companies provide a veritable gold mine of ideas for anyone who wants to cut costs. They have effectively built their success on innovations designed to optimize each link in their supply chain. Some of these innovations can be emulated by traditional players, such as the self-print boarding card option now used by regular airlines. Established players have also often succeeded at developing a culture of frugality and tight cost management reflected in day-to-day employee behavior.

What practices could be transposed from low-cost environments to the traditional economy to improve your profitability?

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