think carefully...

In the West, a price war is something to be avoided. The outbreak of a price war is thought to have disastrous consequences for companies and is viewed as a failure of managerial rationality. In China, where companies have earned a reputation for starting price wars, the outbreak of a price war is considered a legitimate and effective business strategy. In the last 10 years, businesses in China have initiated price wars in a wide range of industries.

And like leaders of legendary battles, price war warriors who happen to be CEO's often become vaulted idols in China, revered by aspiring managers who are eager to enter the price war battlefields and return victorious - which, in price war lingo, means earning the most customers, capturing the greatest market share and driving up profits.

GROWTH vs MATURE MARKETS

Two important factors in understanding price war distinctions are 1. the state of each area's market and 2. the price sensitivity of consumers in each area. Chinese companies have a lot more experience with price wars, which are widely reported business events. This business environment provides many profitable opportunities for companies to engage in price wars and to hone their skills. In a growing market, there are many different companies competing, and the industry finds a way to consolidate. The only way to do that is a price war, where you bring down the prices and push out the less efficient companies.

 But the Western market is normally a more mature market, offering oligopolistic competition among mostly equals. In lieu of price wars, this so-called mature market encourages more finesse in devising marketing strategies, which may help explain why price wars are so frowned upon.

When it comes to customers' price sensitivity in a price war, the Holy Grail would be customers who are extremely price sensitive — and therefore more likely to respond quickly to dropping prices. In China, anytime you lower the price a little bit, you do draw a larger buying audience.

Consumers in US markets, however, are not as price sensitive, as the US market is more layered. When you lower the price, you gain some sales but not on the scale triggered by the price-sensitive Chinese consumers.

• How do Chinese companies assess their business environment to identify the opportunity for a price war?
• How do they decide whether and when to start a price war?
• How do Chinese companies prepare for and execute such a war?