Competitive Business Conflict Escalation
This case study shares a story of how irrational competition can cause damage through conflict escalation between competing airline businesses.
Competition is clearly a healthy means to increase sales for any business. It is essential because it provides a stimulus for a company or organization to prosper and grow. However, does this mean that a company should compete at all costs? The answer is of course ‘No’! There comes a point when excessive competition may cause serious harm when the losses exceed the gains. Sounds like simple common sense, doesn’t it? Yet, there are many examples of escalated negotiation competition that are unsound. Even the big players can be drawn into an irrational escalation.
We all use frequent flyer miles on our travels. Back in 1981, American Airlines introduced the first frequent-flyer program. It was a unique marketing plan. Anyone who flew regularly could redeem their travel miles for rewards. Great stuff!
Taking American Airlines’ lead, all their competitors jumped on the bandwagon and provided a similar frequent-flyers program. To get a leg up on American’s initial advantage, several competitors enhanced what they offered by doubling the air miles. They also offered points for car rentals, hotel accommodations and other innovative tactics.
The airlines continued this escalating negotiation competitive style through the early 1980’s as each airline tried to outdo their competitors. In 1987, Delta Airlines offered triple miles to any passenger who charged their tickets on their American Express card for all of the year of 1988. Analysts took a hard look what this would actually mean as a cost to the airline industry. They estimated that the airlines combined would end up owing their passengers somewhere between $1.5 and $3 BILLION dollars in free trips!
The airlines industry was in quite a quandary now. How could the industry get out of this marketing war that had spiralled out of control? It finally occurred to the airline industry that somebody had to step forward and draw a line. The total airline debt continued to increase with estimates placing it as high as $12 billion dollars towards the end of the 1980’s. The airline companies couldn’t stop competing and had to keep matching whomever raised the stakes. Eventually an announcement was made that the rebate programs would be cancelled.
A similar thing had happened in the U.S. auto industry relating to rebate programs. The other players quickly escalated their rebate offers to potential customers accordingly. It reached a point where the major car manufacturers were selling every single car at a loss. Finally, the CEO of Chrysler, Lee Iacocca made a press announcement. He stated that Chrysler would not renew its rebate program when it expired at the end of the year if the other companies followed suit. He also stated that if they didn’t, he would match or exceed their competitors’ rebate programs. Iacocca drew a line in the sand and sent out a strong message to his competitors. The other manufacturers got the message loud and clear.