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Understanding the Foundations of Fighting and Winning a Price War in the Digital Age

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Document pages: 6 pages

Abstract: For decades with the beginning of competition, many organisations compete on the basis of low prices. Price wars, however, represent a fundamentally different dynamic than simply trying to get an edge on price. They begin when competitors aggressively and repeatedly set prices below established sustainable levels. In some cases, organisations that initiate price wars engage in self-destructive behaviour, which leads to downward pricing spirals that alter industry structures. In theory, there are no winners in price wars: The losers of these brutal competitions are often forced out of business, and the survivors have been known to suffer a long-term squeeze in profitability. Research suggest that in price wars that took place between 1980 and 2013 in industries including airlines, telecoms and financial services, price wars were invariably linked with serious drops in financial performance. Indeed, when price wars erupted, most companies found themselves in commodity traps: Profits narrowed considerably, and weak competitors had difficulty staying in business. The common view in economics and strategy is that a company’s ability to win a price war hinges on having a superior cost structure. However, research demonstrates that this is not the only way to gain the upper hand. Contrary to most studies, under the right circumstances, it’s possible for a company to win a price war by leveraging a specific set of strategic capabilities. Specifically, these include the ability to read the business context and how things are changing, the skills to analyze the market data to identify trends and opportunities, and the pragmatic wherewithal to implement organizational changes both internally and across the value chain. In short, recent research showed that winning a price war can have as much to do with a company’s strategic capabilities and skills as its relative cost position. This new move provokes new thinking on how companies can influence price war outcomes, suggesting that other companies might be able to achieve success by establishing five rules of engagement. The rules will help managers frame the contextual, analytical and pragmatic capabilities by helping them 1) affirm the need, 2) pick the battlefield, 3) pick the target, 4) stay under the radar and 5) align revenues with cost structures and rally support needed to succeed. This paper discusses the foundations of fighting and winning a price war.

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