[Case Study] Competing with a Goliath

HBR’s October 2016 case study deals with Tela a five year old fashion company located in Peru. Tela is producing ponchos in Peru made of local sustainable materials, their competitor Saira produces them in Bangladesh of cheaper materials. Saira is older and has about 60% market share, Tela is only present in Peru, a country where Saira is not present. Both companies are socially responsible; Saira donates one Poncho for each Poncho it sells. Tara is teaching weaving to local workers. Saira’s ponchos cost between $60 and $100, Tela’s between $40 and $70. Tela is not certain which side of their brand they should promote:

• Affordable pricing
• High quality
• Social mission

(Saira promotes their social mission: “buy one, give one free”)

There are four concepts to test:

• Social responsibility: Tela’s support of local entrepreneurs and workers
• Authenticity: Made-in-Peru, a maker of “authentic Peruvian ponchos”
• Affordability: Lower price than Saira
• Mix: Combination of the other three

Social responsibility

• Also done and promoted by Saira; Saira was very successful at promoting their social impact and they started before Tela; Tela risks being a copycat
• Tela’s social impact message (create employment and develop economies) is more complicated than Saira’s (hand out donations)
• “Ride in Saira’s marketing tailwind” (attaching to bigger brand) (similar to the concept of brand and industry wide price elasticity; studies have for example shown that an overall increase of gasoline prices would not lead to decreased demand, the price increase at one particular gas station, however, would result in dropped demand at that one gas station)
• Equals Michael Porter’s differentiation strategy

Authenticity

• A position not exactly occupied by Saira
• Saira has a similar supply chain: They produce in Bangladesh and thus help the economy there
• Will people value this as much as positioning #1?
• Equals Michael Porter’s differentiation strategy

Affordability

• A position not occupied by Saira
• Is the difference of $20 relevant to consumers? A question of price (in)elasticity. One characteristic of price elastic products is their market transparency and uniqueness: A product tends to show elastic demand if consumers know the competitors and the product at hand has few unique features (compared to the competitor). For Tela this means that if they the price difference to play a role they have to clearly differentiate their ponchos for Saira’s.
• Will consumers understand Tela’s cost structure? Is it clear to customers that they can cut costs (compared to Saira) because they do not give any donations and invest less in marketing? Or will they assume that Tela is not paying the workers enough? (“Consumers assume the lower-priced product is lower quality.”) The demand curve teaches us that lower prices equal higher demand. This might, however, not be the case if higher price equals higher prestige or a better image or when consumers infer quality from price. The latter might be true in the case of Tela and Saira.
• Equals Michael Porter’s cost leadership strategy

Combination of social responsibility, authenticity and affordability

• People will get confused about the complex and mixed message
• Very difficult to obtain according to Michael Porter (he calls it “stuck in the middle)

The book “Getting to Plan B” heavily promotes the idea of analogs (what can be copied from other companies) and antilogs (what should be done differently from other companies) when pivoting a company’s business model. For Tela this means that higher prices than what they have now might work, provided that their customers are insensitive to price changes. One way for them to achieve that is by clearly differentiating their ponchos form Saira’s. Also, according to Porter’s strategies trying to be a cost leader and trying to differentiate oneself is not possible. Whereas Porter’s “stuck in the middle”-issues is debated, I will assume it to be true for the case of Tela. Porter’s third strategy, focus, would allow for both, cost leadership and differentiation, as it is focusing “on a particular buyer group, segment of the product line, or geographic market” (as described by Porter in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors). However, as Tela wants to expand beyond Peru, focus is not possible.

Lets, therefore, evaluate the two remaining concepts.

Social responsibility

Using Saira as an analog it is proven that this strategy could work. Tela must, however, be careful that consumers might perceive them as copycats or that their message will be too complicated. They can easily mitigate that issue by clearly promoting what they are doing; supporting local entrepreneurs and workers. Its marketing slogan would, for example, center around: “For each poncho purchased we invest 10% into the education of workers in Peru”. This should be supported by other promotional tools (see Kotler’s principles of marketing for an overview) such as public relations or sales. This would obviously drive up costs, however, as higher costs are not assumed to limit demand (as demonstrated bei Saira), this is not considered an issue. In regards to increased pricing Tela, however, has to keep an eye on not being perceived as commercialized and to not lose their social image.

Authenticity

I believe that this position on its own is not enough to motivate people to purchase. This positioning should effectively transmit that the ponchos “are the real thing”; i.e. that they are designed and produced in Peru. Whereas this positioning certainly appeals to some customers, the social responsibility strategy (“For each poncho purchased we invest 10% into the education of workers in Peru”) is far more result oriented and immediately shows the impact (result) of a purchase. Further, by solely focusing on authenticity the company might have a hard time differentiating itself from Saira due to two reasons; Firstly, although Saira does not produce in Peru customers might not know and project Saira’s charitable reputation onto their supply chain all (halo effect). Secondly, even if customers were informed about Saira’s production location it might not influence their shopping behavior because its “buy one, give one free”-strategy is much more impressive. However, as copying the above proposed strategy would be much easier than relocating production facilities (a USP that cannot be easily copied by Saira), Tela should definitely incorporate their authenticity factor into their overall social responsible strategy.

There is, however, one final thought to be considered: The issues that Tela has difficulties expanding beyond Peru might be due to the fact that their social responsibility is focusing exclusively on Peru. I believe that a socially responsible strategy, tailored to the respective country Tela is operating in, would be a great way to fulfill customers need of giving back as it has direct impact on the country they are living in.

Additional notes

• Evaluate why Tela wants to reposition itself and if repositioning is the right way. In this case we are assuming that a repositioning will help Tela expand which might not necessarily be true.
• Consequences of Tela’s reposition and the entrant into a new market: will Saira lower its prices?

Comments from article

See here how different experts have responded to the case

Mark Rampolla

• Consider the company’s mission: What does Tela want to stand for? What does the founder want to accomplish? (“Market share is relevant, but it’s not a destination in itself.”)
• Look outside the firm: Tela should find out what all stakeholders (consumers, retailers, suppliers, weavers etc.) think.
• Accept a morphing messaging but center it around the company’s soul Tela might, for example, target different customers but each time the message has to center around the company’s soul, i.e. mission.
• Consumers can understand layered messages He argues that it is possible to have a message focusing on sustainability (having an impact on Peru) and an affordable and authentic product. He argues that his exmaple “Tela is the fabric of life. Fabric that warms us, protects us, connects us, inspires us, and benefits all of us.” would feels more like a mission and attract investors as well as retailers and consumers. For me this raises the question whether a company should have different messages for different stakeholders and whether they could manage it (“People don’t want a tagline; they want something to believe in.”)
• Focus more on them (Tela) and less on the competition (Saira) This is truly a nice statement but it lacks foresight. The main reason I believe this is that customers want act like that. Unless their customers act irrationally or are true fans their customers will certainly look out for something that is of best interest for them. There are two interesting management theories around this concept: Blue ocean vs. red ocean.

Tomás Pando

• Beware of brand dilution: Having too many messages for too many target groups might work in the short-term but in the long-term consumers will get confused an not know what the brand stands for. I partly agree. I think a company can have different messages for different target groups, provided that both (target groups and messages) are distinct enough and tailored exclusively to each other. Just consider the difference between B2B and B2C for companies like McDonald’s. Further, I take the view that even within the B2C-segment companies can successfully convey multiple messages, the messages might even alter from day to day: Starbucks, McDonald’s and Subway sell you a great start in the morning and fresh energy in the evening. Apple sells seniors an easy way to connect with their (grand)children and businessmen hassle-free mobile productivity (iPad). However, I believe that it would be far more difficult to convey that the iPad is reliable, easy to use, a lifestyle product and cheap. In this case I partly agree with Mark Rampolla when he states that customers can understand more complex messages. This certainly depends on the person’s educational level, age etc. Moreover saying one thing and delivering are two different stories. Consider Lexus, a Toyota brand, which is selling luxurious cars (competing against the Mercedes’ of the world) at a lower price. However, if you would survey people, I believe that the majority would still consider Mercedes to be more luxurious than Lexus (although I have absolutely no evidence for that). As a second example look at amazon.com (talking exclusively about the web shop). I it safe to say that amazon managed to position itself as a cost leader (lower prices than many other online and offline shops) and differentiating itself through their broad range of available products (and certainly other things as well). Whereas they might be have a great positive social impact on the workers (as Tela tries to) they are not promoting it. It is interesting that through their strategy (biggest range of products at lowest possible price) they have a great impact on their customers (helping them save time and money by selling convenience) but do not actively promote it.
• Stick with a mission for a few years And than promote other aspects of you brand, however sticking to the company’s core mission
• Don’t focus too much on your competition In addition to exploiting your customers weaknesses, find your own niche and story. I have commented on this point already above.
• Do not be to hesitant to try a strategy and change back if it is not working: This is not as easy at it sounds. It has to be considered that there are sunk and opportunity costs involved in this and that their competition will not sleep during Tela’s experimentation.

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