Competition in business are unavoidable. However competition can also afflict an industry like a cancer. Left undetected, competition may intensify and spread, threatening the survival of all but the hardiest competitors. Although it is important to have early detection and anticipation of the competitive market conditions, it is also equally important to understand a few basic underpinning theory before we draft a response.
Think of the value and profit as a pie as as shown by picture above, to be divided among competitors and consumers. Were it not for competition, this value may be shown as picture in the top pie above. Consumers would get some share of the value, but the lion's share would go to the competitors.
- An ounce of prevention is worth a pound of cure. Create conditions for your firm and the industry to minimize the intensity of price competition.
- Be thy brother's keeper. Your actions may harm competitors. Their response may do the same to you.
- People who live in glass houses should not throw stones. Some markets are more prone to price wars than others. If you cannot eliminate the conditions that precipitate price competition, then try to avoid throwing the first stone.
- He who laughs last laughs best. In the worst case scenario, price wars devolve into wars of attrition. If such a battlelooms, it is essential to determine if and how you can win it.
Of course, it never hurts to increase the size of the pie . Or, have additional pies on your plate perhaps.
"We do not have a crisis of competition, we have a crisis of creativity"-KS Lye.
Reference: Dranove,D.& Marciano,S.(2005), "Kellog on Strategy", John Wiley and Son. Canada.