Since volume retailers shifted to selling higher quality products back in the 1970s and ‘80s, they’ve put traditionally higher-end companies on notice. More than half the population now shops weekly at mass merchants like Wal-Mart and Target—up from 25% in 1996—while other “value-based” players like JetBlue Airways and Dell are transforming the way consumers purchase everything from groceries to financial services. It’s quality—or perceived quality—that’s pulling consumers from every age and income bracket to these sellers. What’s the competition to do?

First, say management specialists at McKinsey & Co., focus on areas where their business models give other companies room to maneuver. Instead of trying to compete with value retailers on price, for example, Walgreens now emphasizes convenience across all elements of its business—rapidly expanding to make its stores ubiquitous and ensuring that most of them are on corner locations with easy parking. Companies also will have to focus on rapid experimentation and innovation. And sometimes the experiment will involve creating new versions of an existing business, such as Song (Delta’s new low-price airline), which integrates its offerings in a way that is difficult for low-cost competitors to match.

The McKinsey Quarterly, No 1 2004