Video: Wednesday, 14 May 2014
Companies that do not have the best cost structure can still come out on top in a price war. New research by Associate Professor Patrick Reinmoeller of Rotterdam School of Management, Erasmus University (RSM) shows that a carefully laid battle plan can result in victory – without having an optimal cost structure. It is possible for any company to win, provided it establishes that conditions are right for a price fight; picks a weaker opponent; confines itself to a clearly delineated area; as well as keep everything hush-hush in the run-up to the attack.
Entering into a price war is risky, often takes a longer period of time and is labour-intensive. Therefore, a company first needs to determine whether there is a sound case for a price war. What could justify declaring a price war? Massive changes to the market that have a seriously adverse impact on the company – such as a strongly shrinking market share; an existing business model that has become entirely unfit for purpose; or an attack from a competitor.
On top of that, a company can boost its chances of success by keeping its plan of attack under the radar as long as possible. If a company keeps its imminent price war under wraps and makes no prior announcements, its opponent will receive a double whammy because of the element of surprise. Maintenance of radio silence gives the attacking side more time to carefully work out its strategy for the assault.
Also, an attacking company should carefully define its area of attack; the more limited in scope the area targeted by the attacker, the more effectively a price war can be waged. Finally, it is important to pick a fight with a considerably weaker opponent.
Rotterdam School of Management, Erasmus University
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