Competitive Conflict Escalation

Discusses irrational competition and the damage caused by conflict escalation between competing businesses.

Competition is clearly a healthy means to increase sales for any business. It is essential because it provides a stimulus for our company or organization to prosper and grow. However, does this mean that a company should compete at all costs? The answer is no! There comes a point when excessive competition may cause serious harm when the losses exceed the gains. Sounds like simple commonsense, doesn’t it? Yet, there are many examples of escalated competition that are unsound. Even the big players can be drawn in this irrational escalation.

We all use frequent flyer miles in our travels. We know what they are, and the benefits that can be had from these types of programs. Back in1981, American Airlines introduced the first frequent-flyer program. It was truly 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 competition 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. Whew! This was not small change to say the least.

The airlines industry was in quite a quandary now. How could the industry get out of this marketing war that had spiraled so out of control? It finally occurred to them that somebody had to step forward and draw a line, but nobody did at first. 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 whichever one of them raised the stakes. and clear. They also announced the cancellation of their rebate programs.

The same thing had happened in the U.S. auto industry who engaged in rebate programs. The other players quickly escalated their rebate offers to potential customers accordingly. It actually reached a point where the major car manufacturers were selling every single car at a loss. Finally, the CEO of Chrysler, Lee Iacocca held 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 rebate programs otherwise. Iacocca drew a line in the sand and sent out a strong message to his competitors. The other manufacturers got the message loud.

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6 of 10 people found the following comment useful:

Good Article - 2007 Oct 8
Commentator: Abdul (Saudi Arabia - Ar Riyad)

"I enjoyed reading this good case."

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