Many companies compete on the basis of low prices. Price wars, however, represent a fundamentally different dynamic than simply trying to get an edge on price. They begin when competitors aggressively and repeatedly set prices below established levels. In some cases, companies that initiate price wars engage in self-destructive behavior, which leads to downward pricing spirals that alter industry structures. In theory, as Meghan R. Busse of Northwestern University’s Kellogg School has shown, there are no winners in price wars: The losers are often forced out of business, and the survivors have been known to suffer a long-term squeeze in profitability.
In studying price wars that took place between 1980 and 2013 in industries including airlines, telecoms and financial services, I saw that price wars were invariably linked with serious drops in financial performance. Indeed, when price wars erupted, most companies found themselves in commodity traps: Profits narrowed considerably, and weak competitors had difficulty staying in business.
The common view in economics and strategy is that a company’s ability to win a price war hinges on having a superior cost structure. However, my research demonstrates that this is not the only way to gain the upper hand. Contrary to most studies, I found that, under the right circumstances, it’s possible for a company to win a price war by leveraging a specific set of strategic capabilities. Specifically, these include the ability to read the business context and how things are changing, the skills to analyze the market data to identify trends and opportunities, and the pragmatic wherewithal to implement organizational changes both internally and across the value chain. Such was the case of Albert Heijn (AH), a Dutch company in the grocery industry, during a price war it initiated in the Netherlands between 2003 and 2005. AH showed that winning a price war can have as much to do with a company’s strategic capabilities and skills as its relative cost position. The case provokes new thinking on how companies can influence price war outcomes, suggesting that other companies might be able to achieve success by establishing five rules of engagement.