McKinsey Quarterly writes on how to respond to the challenge from value players:
To compete with value-based rivals, mainstream companies must reconsider the perennial routes to business success: keeping costs in line, finding sources of differentiation, managing prices effectively. Succeeding in value-based markets requires infusing these timeless strategies with greater intensity and focus and then executing them flawlessly. Differentiation, for example, becomes less about the abstract goal of rising above competitive clutter and more about identifying opportunities left open by the value players business models. Effective pricing means waging a transaction-by-transaction perception battle to win over consumers predisposed to believe that value-oriented competitors are always cheaper. Competitive outcomes will be determined, as always, on the groundin product aisles, merchandising displays, process rethinks, and pricing stickers. When it comes to value-based competition, traditional players cant afford to drop a stitch.
As competition becomes increasingly about differentiation and execution, CEOs will have to focus their organizations on rapid experimentation and innovation, the development of superior customer insights, effective pricing and promotions, and frontline efficiencies. The big challenges will be diagnosing where a companys capabilities fall short and then building these skills quickly. While spearheading change-management initiatives with relentless energy, senior managers should be prepared to think creatively about partnerships and alliances to acquire the needed talent.
Differentiation: To counter value-based players, it will be necessary to focus on areas where their business models give other companies room to maneuver. Finding and establishing a differentiated approach isnt easy and often requires trial and error. Competition in value-based markets will therefore be characterized by considerable experimentation in categories and formats to hit on a winning formula.
Execution: Value-based markets also place a premium on execution, particularly in prices and costs. There is no easy answer to this challenge, but its helpful to recognize that value players tend to price frequently purchased, easy-to-compare products and services aggressively and to make up for lost margins by charging more for higher-end offerings.