Here are some thoughts on the study of the theory of price wars as they relate to the industries like the Airlines and others. Comments on an article in Harvard Business Review in March-April edition 2000. The article was called ‘How to Win a PRICE WAR’. Written by Akshay R. Rao, Mark E. Bergen and Scott Davis.
They start out the article, that in the game of business, many tactics are used to ward off competitors. Increasingly PRICE is the weapon of choice. It talks about how the quest for market share and market dominance by continually lowering prices by each side of a price war can drive down Industry Profits. Oh Really? But who cares what the Industry does anyway. Is it not the consumer that pays for your dinner and youremployee’s kids college tuition? It sites the 1992 Airline wars Between American, Northwest and others as an example. The result was record air travel and record losses. Surely this example cannot be used in modern context, because at the time each airline was flying both McDonald Douglas, Boeing and Lockheed Aircraft. With Pratt Whitney and/or GE Engines. Similar in fuel consumptions, similar ticket distribution system, similar airport landing fees and similar customer base.
Now to really win that war and decrease losses you would have to become more efficient in reservations, cut staff, more efficient in facilities, feeder airlines, scheduling, fuel consumption and in other services related to airline travel you were involved with. They did not, they simply engaged in a price war, to shake out the weak. Now for the consumer the lower prices were great, for the stockholder they were not. But they could have been. The authors site this as damaging the industry. An Industry that takes wartime aviation advances and a few years after to allow for the new technology to reach the private sector with new and efficient aerodynamics and electronic positioning and fuel allocation devices.
If the MBA number crunchers would look at the real problems and design a superior system in the airlines at that time rather than always doing the obvious and previous chess moves then they might get an upper hand. Because necessity is the mother of invention. Price can drive the market and the winner in the most free of Friedman models would be that company which can innovate and adapt and US MARINE their way to the next level, like is such in the new digital economy. But airplanes only go so fast, there is friction, drag, lift, weight and thrust and that is all you can get right? Wrong. Remember when Chuck Yeager broke the Speed of Sound in the Bell X-1? It was impossible. And the Moon? Never! You see it is those who do not or will not push the envelope and not dare to risk that will lose in the price war. The Industry? Who cares about the Industry. Re-create it. An Industry is a boundary, so is the atmosphere, the copper cable lines, the ones and zeros that make up computer language. Industries set standards. Break them. Industry set limits, ignore them, Industries make experts. Challenge them. Industries print magazines and give advice, do not read it. Driving down prices in any Industry makes that Industry and forces the weak to either adapt or exit the market place.
Their article is like saying that an Olympic athlete who works out too hard and sacrifices too much should slow down to 5-minute miles in the Marathon and let the other runners catch up. Hog wash. Or let the other basketball team score more points and put in your weakest players so that it makes the game look close? Why, Capitalistic markets dictate competition and competition dictates compelling reason to excel. I say take that challenge, deliver great quality, lower prices and raised standards. Oh Sure the Unions want everyone to get paid for as little work as possible, too, they do not want a wage war either. But a wage war might improve efficiency. Less work for may pay. Who does that help? Is that not a little short sided? All that does is reward inefficiency. We are to believe by this article that a price war hurts an Industry? Who says the Industry should be allowed to exist? The consumer or the Industry?
Is Harvard Business School so hard up for articles that it will allow this type of content and flawed thinking into their reviews? Why should you reward an Industry and recommend against price wars? Should we then have price collusion and price fixing? That is the other option. A price war weakens Industries? Or does it keep them in check, and keep them from getting too fat, dumb and happy? Strong survive, free market economies are theoretically based on the evolution of business. Just because an Industry forms Associations and lobbyists and sets standards of price and quality, does not mean it should be allowed to garnish higher prices from consumers and not have market pressures of competition, especially the major market pressure of price, which will always be the great equalizer in the current system all businesses in the US operate under.
One quote in the article is hysterical:
PRICE WARS CAN CREATE ECONOMICALLY DEVASTATING AND PSYCOLOGICALLY DEBILITATING SITUATIONS THAT TAKE AN EXTRAORDINARY TOLL ON AN INDIVIDUAL, A COMPANY, AND INDUSTRY PROFITABILITY.
Lots of big words guys, but this reader does not buy it. First off nobody said life was suppose to be stress free in personal life, business or otherwise. When you are born, during birth your body is under more stress moving through the birth canal than at any other time in your life. So forget about this easy ride thing. The strong survive. No athlete can expect to stay on top without hours of training, commitment, sacrifice and training. Nor should they be allowed to. Because world records are not won without competition and pushing of the envelope. Likewise no business should be allowed to operate at anything less than optimum efficiency. If they do they are lazy and they should be challenged, this helps the dynamics associated with a free economy.
The airline example does not take into consideration some of the strides made by some of the then competing airlines. Continental Airlines instituted a fuel savings program to Pilots who were given a percentage of Lbs saved in fuel as a bonus. By cutting off the direct paths from station to station (VOR) they were able to save fuel and time in flight, thus able to lower cruising speeds, less drag on the hyperbolic curve and save millions each day in fuel. This came out of the price wars. Many other similar efficiencies also came out of those price wars.
The authors then site the long distance charges war started by Sprint on weekends at 5 cents per minute and then matched by MCI and AT&T. Good for consumers and now we may see in a few years no long distance charges in Continental US. This hurt Industry profits. Yes, but so what. Consumers got a better deal, and if the phones companies were at the top of their game then they would have been able to offer those savings prior and not been caught off guard by Sprints move. Why did they already not offer these lower prices since they could have?
What these authors and Professors did not mention is that the best way to win a price war is simple. Start the price war, but not until you are 100% at the top of your game. If you are at the top you can win a price war. But be active, not re-active. Be the price breaker, the ball buster, the Iron fist. Move to make the first blow, so deep, so hard, without falter and be ready to move, and adapt with the battle. Take what is yours because you are at the top of the game. Be ready to make unexpected moves at a split second and fire blow after blow. Be ready to break Industry norms, forget the rules, the perception of the Industry, disregard its experts, its leadership, its foundation. If you want to run at redline in a race with cars that go all the same speed and use only part of the track then go ahead. But this team and teams like it in various Industries all over will beat you.
Because the first thing they teach us at racecar driving school is use the whole track. And if you are not in the unlimited class then you are controlled by weight, speed, size and timing. If you let others set your limits then the authors have a point, in all other cases they need to stop writing articles. Publish or Perish? Whatever guys, I guess if you cannot, you can always teach.
I love price wars and we have never entered a market area, digitally or anologely, that we have not won when implementing a price war.
Rule number one when competing for price. START THE WAR.
Number two. BE READY TO ADAPT.
Number three. BE THE BEST AND MOST EFFICIENT BEFORE YOU START.
Number four. DO NOT FOLLOW ANY INDUSTRY STANDARDS OR SET ANY LIMITS.
Number five. DO NOT HAVE A TIME LIMIT ON THE WAR. WAR IS HELL ASSUME IT LAST FOREVER.
Number six. HAVE SUPPLIERS ON YOUR TEAM.
Number seven. TELL THE WHOLE WORLD ABOUT YOUR PRICE CUT AND WHY.
Number eight. RAISE STANDARDS OF QUALITY AND EASE OF USE FOR CUSTOMERS SIMULTANEOUSLY.
Number nine. BUNDLE SERVICES RIGHT BEFORE YOU START THE WAR.
Number ten. RUN THE PRICE WAR IN ALL AREAS AT ONCE.
Number eleven. LOWER PRICES BY ONLY 60% OF WHAT YOU CAN, SAVING FORTY FOR LATER, WHEN THE REAL WAR BEGINS.
Number twelve. HAVE CAPACITY RADY TO TAKE ON NEW CUSTOMER BASES AS COMPETITORS LEAVE THE MARKET.
Number thirteen. CREATE A MASSIVE DIVERSION RIGHT BEFORE YOU START SO THEY WILL NOT SEE IT COMING.
Number fourteen. GET THE INDUSTRY TO AGREE ON PRICES AND CUSTOMER SERVICE ISSUES BEFORE YOU ATTACK.
Number fifteen. MAKE THE INDUSTRY DEFEND THEIR POSITIONS AND TRACK RECORDS.
Number sixteen. HAVE INSIDER INFORMATION ON YOUR COMPETITION AND KNOW THEIR NEXT MOVE.
Number seventeen. ADVISE YOUR COMPETITORS THAT THEY ARE BREAKING THE INDUSTRY NORM, EVERYTIME THEY LOWER SERVIC TO COMPETE ON PRICE, AND ALERT THE INDUSTRY NEWS.
Number eighteen. GO STEATH-SILENT FOR THRE MONTHS PRIOR TO WAR.
Number nineteen. MOVE SWIFTLY, AND ATTACK IN YOUR COMPETITORS MOST PEAK SEASON, RIGHT AFTER THEIR SLOWEST MONTH.
Number twenty. HAVE BRAND NAME RECOGINITION TO CARRY YOU THROUGH.
Number twenty one through twenty five and the most important of all. I CANNOT TELL YOU THESE.
Many business books will tell you, you cannot have price or quality. BS-Have both, who says it has to be one or the other? The Experts, the professors, the Industry Leadership? Who cares what they think. Business Industry Leadership will say at the start of any price war,
YOU GET WHAT YOU PAY FOR! NOBODY CAN AFFORD TO DO IT THAT CHEAP.
Yes but are you paying for what you are getting? That phrase is a simple cop out. And can no one there really not do it? Or are they admitting that they can not do it and are projecting their inferiority onto your company, like personifying an inanimate object. Nobody can keep up that Marathon pace. Good keep thinking that. If you have inside information that this is occurring you are winning and should lower it again, because they will surely never catch up for lost ground or lost market share and you have the synergy and the power of presence on your side. This is how markets are won. A denial, and a sure sign that you have competition, who not only does not understand your Industry, but also cannot allow themselves to adapt. Pray for this scenario to take place, it is typical and means you are doing it right.
Take a company for instance, which has Great prices, great service, great customer base, great image, on the leading edge of all aspects and more efficient than the nearest competitors. A company like Dell. So when they wage a price war on the competitors in our markets, who wins? The consumer number one. And Dell because the competition cannot participate in our price war. Overhead too high, and they refuse to break Industry ranks. All the while the consumers overwhelmingly choose Dell, not Gateway or HP-Compaq. Why. For all the same reasons above.
There are Lots of great examples of case studies in the article, all out of context and few touch on any depth to prove any points, except that the authors are well read. I would challenge any of these authors to put money on any company any company in the PC business industry. PRICE WAR is the weapon of choice, it is the same as picking up the pace in a Marathon. If you are the better runner you leave everyone else in the dust, if you are not the best runner, it is your fault for not preparing or training tough enough in the life you lived for the decades leading up to that event. Be the best and start the war, raise the bar, raise the standards, pick up the pace and lower the prices, then be prepared to finish a marathon.