me article review group5 sectionb

8/8/2019 ME Article Review Group5 SectionB

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How to fight a price war A critical review

Submitted by:-

Group 5, Section B

Amenla Jamir (pgp26073)

Arjit Anand (pgp26079)

Gagandeep Singh Nanda (pgp26086)

Paresh Jha (pgp26106)

Sandeep K Goel (pgp26113)

Saumitra Nanda (pgp26116)

Vinay Laxman (pgp26128)

Brief summary

The article gives an insight on how a price war is initiated in markets, factors which lead a company

to enter into a price war, various strategies a company can explore to fight the price war or all

together desist from it.

Price is seen as a key factor in acquiring market share as it is considered to be a reversible change,

but often it leads to a price war, decreasing the overall profit margin if the competitors also indulge

in cutting prices. As a result of customer expectations of decreasing prices it becomes difficult to

reverse the price change. It is necessary to understand the motivation behind the price cut, followed

by an intelligent analysis of the situation taking into account customer issues such as price sensitivity

and segments, company issues such as cost structures, capabilities and competitor issues as rivals

cost structure and capabilities. Analysis of above said factors provides the company various

alternatives to fight the price war as following:

1. Preventing start of price war A company can reveal its strategic intentions and also its low cost

structure as an advantage to deter the competitor from entering into a price war.

2. Responding with a non price action Increase product differentiation and build awareness to

refrain from cutting prices and preserve the brand image. Form strategic partnership with

suppliers, resellers and vendors.

3. Using selective pricing actions Offer bundled prices, quantity discounts or loyalty programs for

products. Introduce parallel flanking brand with low price to maintain brand image and

customer loyalty in original brand.

4. Enter a price war In many occasions a company entering a price cut to fight price war is a

viable option but has long term implications.

5. Retreat Some business might choose not to enter a price war by focussing on innovation



Academic and Economic Perspective

It should be noted here that price wars will be present mostly in oligopolistic market structures. In

such markets, the number of sellers is limited, each seller has a significant market share and the

products are differentiable to an extent. Most of the examples given in the article are from

oligopolistic structures, like the aviation sector and the telecom sector. Hence this article makes usbetter understand the pricing decisions and the strategies employed in such markets.

Relevance from business perspective

The article is highly relevant from a business perspective. Price wars most often strike industries

where there is both heavy competition and several comparable products. Under these conditions,

there is a large incentive for a competitor to cut prices in order to gain a greater share of the market.

Left unchecked, a price war can spiral into a string of ever-lower price cuts that evaporate profit

margins. Firms with fewer financial resources may even be put out of business. The airline industry is

a classic example of an environment for price wars. Air travel is viewed by consumers as a

commodity product - transportation from point A to point B. Since the service offerings of different

airlines are so similar, consumers look primarily at price when they buy. This has led to virtually

continual fare wars in different markets around the world.

The article highlights what strategies can be employed by the managers to defuse, fight or cede from

a price war. Cutting down prices is the most common strategy that is employed by competitors and

result businesses frequently have to respond to such situations. In the Indian context, there has

been a major price war in the telecom and the FMCG industry as a result of entry of new players. Let

us look at both the examples.

Responding to price war in the FMCG sector due to entry of local players

Recent trends have indicated that India's large consumer products companies, HUL and P &G are

losing their grip on the market for almost everything from soaps and shampoos to toothpastes and

skin-creams. This is attributed to factors like consumers switching to cheaper regional brands and

the companies focus on high-value products even at the times of recession. HUL had focused largely

on premium brands such as Ponds and Dove, expecting improved profitability, at a time consumers

were hunting for value offers in the slowdown. In soaps, for example, consumers have been

downgrading which has helped mass positioned brands like Godrej No 1. Also hurting India's largest

personal care product makers were the price warriors who moved swiftly to ensure higher visibility

during the slowdown. Regional brands like Chik in shampoos, Dyna and Santoor in soaps, and Nirma

and Ghadi in detergents swiftly raised trade margins and extended credit period for the trade.

HUL and P & G have responded by investing heavily on smaller soap brands like Rexona, Breeze andHamam and reducing prices of detergent brands such as Wheel and Surf. Corrective measures

include lower priced unit packs and increased promotions for value brands. The companies have also

hiked retailer margins in some categories.

Responding to price war in the Indian telecom sector



Much of the telecom growth in last 10 years was as a result of reforms imposed by the TRAI. As a

regulator it imposed many rules which set the tune of growth and suggested price which was

affordable to end customer. Economies of scale made sure service providers got sufficient returns at

the TRAI recommended price. But from the start of 2008 this economics of price and return seems to

be broken because of entry of new entrants in each telecom circle. The telecom players have been

marked by rapidly decelerating average revenue per user (ARPU).The entry of operatorsincluding Japan's NTT DoCoMo and Russias Sistema (SSAq.L) has pummelled call rates. DoCoMo was

the first to introduce the pay per second and the Diet SMS plans (one paisa per character). As a

result the existing Telecom players like Airtel and Vodafone had to follow.

The question that arises now is what these telecom companies should do to ensure that their

bottom lines arent eroded away. These companies should now focus on how to compete on non-

price points. VAS competition is a good way to do it as it does not hurt the basic margins. With the

coming of 3G and later 4G, the telecom companies can get innovative and offer new services. In

addition to this Bharti Airtel is following a consolidation strategy. It bought a 70% stake in

Bangladeshs Warid Telecon and then acquired Zain Telecom in Africa. Bharti is focusing on

expanding in emerging markets on a priority basis.

Limitations of the article

1. The article adopts a qualitative approach to study the price wars and focuses on strategic

decisions rather than a quantitative approach to justify and reason out the strategies

adopted.

2. The article fails to mentions the macro economic conditions and regulations prevailing in the

markets, which can have a substantial effect on the pricing decisions of companies in that

region.

3. The article also fails highlight the long term effect of pricing decisions taken by the

companies as mentioned in the article.

me article review group5 sectionb

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