Won’t price competition eventually lead to more price competition and kill the industry?

Q: We read your column of last Friday on price competition that will accompany the coming Asean integration. Your diagnosis and marketing prescriptions made complete sense. But that’s in the case of the glassware market.

Our case and experience are very different. We used to be in the “lechon manok” (chicken roasting) business of the ’80s. We were quick to join the lechon manok craze then. Within a year of the start of its popularity, as more and more lechon manok stands and stalls populated major street corners and main roads, price competition intensified. This led to a fight for market share, that got fiercer and saw the industry market growth decelerating.

Then, prices for the whole chicken, for example, were cut in half within the period of less than two years. Instead of lesser price competition, the decline in market growth led to more price competition. So prices also further declined and many of us decided to exit. The lechon manok industry was dying if not dead.

Our experience tells us that something similar will happen with price competition when the Asean integration starts next year. What do you think? Won’t price competition lead eventually to more and more price competitions and so kill industries like ours?

A: You’re right in saying that your case is different. But just because your case is different does not mean your predicted sequence of events will come true.  Let’s look more closely at your prediction.

According to your experience-based prediction, intensifying price competition will lead to a fight for market share. As the fight for market share gets fiercer, this will lead to a decline in market or industry growth accompanied by further price decreases. Then the market growth decline will lead to more price competition instead of lesser with prices also decreasing further. The end of it all is industry death.

Let’s look first at the facts of your industry especially your predicted end stage. The market for “litson manok” (as its originator likes to spell it) is alive and well. What happened in the ’80s was an industry shake down. Marketing history is full of such market consolidations. As expected, the strong survivor was the industry originator and creator, Sandy Javier and his Andok’s in Quezon City. Andok’s has not only survived but has grown and prospered. The last time I heard of Andok’s, it has expanded to more than 300 stores and all over the country. That’s a reality the industry participants as well as to the industry itself must accept. To deny this reality is a delusion. But it is a form of denial that is a natural tendency for those of us who failed to survive an industry shake down as was true in lechon manok. Be on guard against this denial because it can be a risky business blinder. It’s at the heart of your false and unrealistic industry end-stage prediction.

As to the other components of your predicted sequence of events starting from the intensification of price competition, you may want to look at them from another lens. A less bleak understanding of what may happen can come from seeing all your predicted events as market behaviors: the intensifying price competition, the fight for market share and its consequent decline in market growth, and further price decline, and back to more price competition.

When you consider all those events as market behaviors, that is, behaviors of both buyers and sellers, you then realize that since each event is a behavior, choice therefore was exercised. Sellers chose to intensify price competition and buyers chose to accept. To fight for market share via more price competition was also a choice. Let’s pay more attention to this last choice.

To fight for market share via more price competition is not the only choice option.  In fact, according to marketing history and best practice literature, most competitive moves for gaining or regaining market shares made use of non-price levers.  The more successful lever has been and still is new product intros.  These are not new product breakthroughs but more like product improvements or next generation products.  The case of Coca-Cola versus Pepsi during the “Pepsi Challenge” years of the 80s is an insight-rich case in point.

The Harvard Business School case on the Pepsi Challenge tells us that the only real threat to Coca-Cola’s market share dominance came out of the Pepsi Challenge. The Pepsi Challenge invited all cola drinkers especially Coke drinkers to “Let Your Taste Decide” which taste is more popular with Coke drinkers in particular. In their taste test study series, Pepsi was the consistent winner.

How did Coca-Cola respond to this market share threat from Pepsi? Not through price competition but via new products. For example, Coca-Cola developed and launched Cherry Coke, Diet Coke (which was very successful), and initiated a formula change in Coke for the market launching of the “New Coke.” This latter move failed and became a classic case of a disastrous new product failure matching the infamous Edsel of Ford.

That formula change failure became the focus of most marketing analysts.  For your case and questions, it is beside the point. The pertinent lessons and Marketing Rx’s flowing from the Coke vs Pepsi case about market share competition are: (1) “Avoid fighting for market share via price competition or you will worsen your market share loss.” (2) “Follow best-practice in responding to market share competition via product improvements, next generation product development, and new product development so that the contest does not deteriorate into toxic and wicked price competition.”

Keep your questions coming.  Send them to me at [email protected].