Overview

How prices war influences competitors' response An analysis of competitors-their cost structures, capabilities, and strategic positioning-is equally valuable. Industrywide price reductions may be appropriate under certain circumstances. But many unprofitable price wars happen because a company sees an opportunity to increase market share or profits through lower prices, while ignoring the fact that competitors will respond. Market research may reveal that sales increases following a price cut justify the action, but this same research often simply ignores competitors' price responses. Businesses need to pay attention at the strategic level to the twin questions of who will respond and how. Smart product managers recognize the need to understand the competition and empathize with them. They project how competitors will set prices by carefully tracking historical patterns, understanding which events have triggered price changes in the past, and by tracking the timing and magnitude of price responses. They monitor public statements made by senior executives and published in company reports. And they keep their eyes peeled for activity in resource markets: competitors that acquire a new technology, labor force, information system, or distribution channel, or that form a new brand alliance, will probably make some kind of a price move that will affect other players in the industry.A company's direct competitors that share the same technology and speak to the same markets are important rivals. But indirect competitors that satisfy customer needs through the use of different technologies and that have completely different cost structures are perhaps the most dangerous. In fact, direct competitors such as major airlines frequently coexist quite peacefully. Examining their pricing-decision rules suggests why. U.S. Department of Transportation studies indicate that when one hub-based airline enters another's hub, it typically does not engage in price-based competition because it fears retaliation in its own hub. Conversely, price wars may often be started by a company from an entirely different industry, with a radically different technology, whose cost advantages give it enough leverage to enter your market and steal your share. The process of identifying competitors also reveals the strengths and weaknesses of current and potential rivals. This has important implications for how a company competes. It is generally wise to not stir a hornet's nest by starting a price war with a competitor that has a significantly larger resource base or a reputation for being a fierce price warrior. When analyzing your competition, carefully determine who they are, how price fits with their strategic position, how they make pricing decisions, and what their capabilities and resources are.

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