You might be interested to click here to check part I of this post.
There are three answers to this question, the right one would be dependent on overall situation of a specific firm. The first one: differentiate based on technology that your competitor does not have immediate access to (such as, in the case of mobile phone service providers, it could be 3G, wireless broadband, etc.).
The second one: accelerate the change in industry structure in the same direction as the current trend is showing! Yes, this is counter-intuitive and sounds crazy. Simply it means you accelerate the trend of moving towards more of a “pure competition” structure from monopolistic competition structure and outsmart competitors’ move to do so. It may be done by eliminating differentiation, cut all extra services, and just get into a basic voice service with the lowest cost possible. How would this work? This strategy will work in two ways. First, assume that being the lowest cost provider, you would have lots of customers who would be switching in from other brands. Once you have gathered a crowd of customers around you, you can target niche groups within this crowd and place differentiated offers to offset potential loss of profits from price wars. This is something like undifferentiating a market at macro level so that you can differentiate at micro levels later. Second, once a preempted price moves the market into a commodity-like structure, big players would want you to come back from this scheme and woo you in an “underground price cartel” (mostly illegal, and not recommended). Usually, a competitor’s threat of preempted price to turn a brand into commodity hits the strongest brand first, and if syndication is not possible (because of legal and ethical reasons), the stronger brands will show signals in their prices that they are not interested in price war anymore.
The third one: go for “lean” process that calls for cutting costs in any process that does not add value. Well, this is a strong statement, because even a minute amount of value creation may be traced in any process that seems to be a good candidate for pruning. The problem is, in a sustained trend of price wars, there is no alternative but to keep looking for “lean process” candidates. While cost cutting itself may not be a sustainable strategy in the long-run, it is a concomitant strategy that needs to be used with other strategy options. It can also be combined with the strategy of reducing price of a strong brand in such a way that its price still stays above the market average price of all other brands, signaling the superior image of it.
The bottom line: price war is the most troubling, baffling and hated phenomena for brand professionals. At the beginning of it, strong brands usually do not like to respond, but only at the time when they find their market share dented. Price war appears in different industries at different life-cycles for various reasons. Therefore, there is no one-shot panacea to face this challenge. Brand professionals need to carefully assess the situation and apply a strategy-mix to counter this challenge.