The Fall of an Industry Leader - Part II

Blockbuster declared bankruptcy in September of 2010. According to reports, the company was done in by the online service of Netflix and the in-retail store kiosks of Red Box. That is only partly true. The company was done in, first by its failure to recognize and respond to market opportunities when others created them and, second, by its determination to extract higher prices than its performance in the market warranted. Its failure as a company was a long time coming. It started in the late 1990’s. Since 2002, the company has lost more than $4 billion. Its market value fell from $4 billion eight years ago to just $12 million at the time of the bankruptcy.

In Part 2, we will look at some of the highlights of Blockbuster’s pricing over the last few years.

This may seem surprising, but the industry’s prices began their long-term decline as early as 1982. This is not unusual. Fast-growing industries often see price declines as new competitors enter the market with plenty of capacity to serve even fast-growing demand.

* In the early 90s, Blockbuster changed its pricing scheme. It had offered a movie for two nights at $3. Blockbuster changed its price to $2.50 per night. It also charged late fees. This change in pricing hurt smaller competitors, who often got business when Blockbuster was out of product due to its two-night rental policy.

* By 1994, Blockbuster felt it could raise prices with impunity, and it did raise prices. (See the Perspective, “Can We Raise Margins With a Price Increase?” on StrategyStreet.com.)

* By 1997, prices were coming under pressure due to the fall-off in demand growth caused by other forms of competition. Blockbuster and its video tape competitors had to begin reducing prices. (See the Symptom & Implication, “The Industry is Seeing its Frist Price Wars” on StrategyStreet.com.)

* In 1997, Blockbuster introduced customer loyalty campaigns to hold on to its most important customers. By then the company was earning less than its cost of capital.

* In 1999, Blockbuster introduced a rewards card. The card cost about $10 and allowed a card-holding customer to obtain one movie free each month. It also offered one free movie for every five rented in a month, and one free “Favorites” on Mondays, Tuesdays and Wednesdays. This was an attempt to create greater sales with existing customers. Movies rented for $4 a night, but late fees could often double or even triple that cost.

* In 2002, video on-demand began to grow. One company offered 430 movies for an average of $3 per rental.

* By 2002, several consumer-oriented articles argued that the late fees charged by Blockbuster would be enough to cover the cost of a Netflix subscription. Customers grew angry over the late fee prices.

* In 2002, Blockbuster responded directly to Netflix with three pricing plans. First, a customer could rent two videos at a time for $20 a month. Second, the customer could rent three videos at a time for $25 a month. In the third program, a customer could pay about $60 a year. This would allow the customer to keep three movies during the year without late fees, but the customer would have to pay for all movies rented. In the meantime, Netflix continued charging $20 to rent three movies at a time.

What do we learn from watching Blockbuster’s pricing over the years? During the 80s and 90s, Blockbuster was leading the industry on pricing. This was a double whammy for its competitors. It offered bigger, better stocked stores at lower prices than its competitors. But somewhere in the mid-90s, Blockbuster lost its edge. It decided that it had earned the right to have higher prices simply because it was the leader. Netflix continually beat Blockbuster on pricing. Red Box did the same thing with its $1 per night rental charges. Blockbuster was in a Leader’s Trap, and stayed in that unfortunate position for far longer than most industry leaders. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.)

Blockbuster engineered its own demise by failing to keep up with the performance of the new leaders in the industry, such as Netflix and Red Box, and by charging more than its competition for performance that failed to match theirs.

Pricing Myths

There is a price war going on in the retail liquor department. This is good news for those of us who enjoy a drink but bad news for the liquor companies.

It seems that consumers have been switching their purchases to less expensive brands of liquor during the recession. They are not drinking less, though. (See the Symptom & Implication, “Low end products are gaining share of the market” on StrategyStreet.com.) The volume of spirits sold in 2009 was up by 1.4%, but the revenue remained flat due to price discounting and consumers shifting to cheaper brands.

Diageo, the world’s largest liquor producer, is part of the industry’s problem. This company has been aggressive in reducing its prices with the two-fold purpose of holding on to their current customers and gaining share against other liquor producers. The falling prices are most obvious with vodka, tequila and gin. Some competitors of Diageo are refusing to go along with the price discount. For example, Patron, the maker of Patron tequila, has resisted the price cutting. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) The CEO of Diageo believes that his discounting has helped the company gain market share and retain consumers. Still, his revenues are off compared to the previous year.

The equity analysts believe that price discounting will hurt Diageo’s brand equity. I disagree.

The history of many markets is replete with examples of branded goods who have had to discount during difficult times. Remember Marlboro Tuesday? How about the price wars in the 80s and 90s in beer, disposable diapers, fast food, tires, farm machinery, construction equipment, appliances and personal computers, to name just a few? Companies must respond to shifting consumer preferences and most price discounting.

An industry in overcapacity is certain to experience price discounting. It is true that this causes customers to become more price-sensitive, but that price sensitivity lasts only as long as industry competitors will discount against one another. (See “Video #11: What Ends Hostility” on StrategyStreet.com.) Once the period of discounting has passed, companies regain pricing power and branded equity is as strong as it ever was. For proof, consider the brand leaders in the industries cited in the previous paragraph.

Part of a company’s brand equity with consumers is the fact that the company is viewed as pricing “reasonably” with competitors. If a company will not price with rough equivalence to its competition, it also destroys its brand equity. Consider General Motors in the 80s, IBM in the personal computer market and Xerox in copiers. You don’t want a reputation as someone who prices high just because you believe that your brand is better than everyone else’s. That way leads to big troubles.

Impressive Results from a Change in Pricing Strategy

About a year ago, we wrote a blog about the leading ski resort in Northern California, Squaw Valley, emerging from a Leader’s Trap (see Blog here). We predicted at the time that Squaw Valley would gain market share quickly as a result of its change in pricing strategy. The preliminary results from this change in strategy are in. They are impressive.

First, some background. For several years, a large well-run ski resort, Northstar, offered very attractively priced season passes. The other ski resorts largely ignored Northstar’s pricng, so that ski resort gained market share with its low-priced season passes. (See “Audio Tip #141: The Power of Price in Non-Hostile and Hostile Markets” on StrategyStreet.com.) Last year, Squaw Valley, the largest and most varied ski resort in North Lake Tahoe, reduced its season pass prices drastically from something like $1449 to either $369 or $469, depending on black-out dates. (See “Audio Tip #102: When is Price Likely to go Down?” on StrategyStreet.com.) This change in pricing reduced Northstar’s season pass price advantage over Squaw Valley’s season pass from 75% to about 11%. (See “Audio Tip #107: Peers and Their Pricing”.)

With something less than half the season completed, virtually all the resorts in North Lake Tahoe have seen an increase in skier visits. The economy has recovered somewhat and the snow has fallen in abundance for the first time in the last four years. Here are the changes in individual resort skier visits for a few of the larger resorts in North Lake Tahoe:

* Northstar +10%
* Alpine Meadows/Homewood +20%
* Sugar Bowl +21%
* Squaw Valley +46%

By any measure, Squaw Valley’s change in pricing has brought it a massive increase in market share. Of course, the growth in revenue is considerably below the growth in skier visits due to price discounting. However, each of those additional skiers also is likely to be a customer for (undiscounted) food, beverages, equipment and other purchases at the resort.

My guess is that the Squaw Valley resort joins the rest of the local businesses in North Lake Tahoe in being delighted at the results of Squaw Valley’s change in pricing strategy.

Is The Mojo Coming Back?

In early February, we did a blog on Abercrombie & Fitch and its Leader’s Trap (see blog Here). The company refused to lower its prices for fear of damaging its high-end, exclusive image. (See “Audio Tip #134: What are the Objectives of Our Pricing Policy?” on StrategyStreet.com.) The blog predicted that Abercrombie would have to lower its prices anyway.

In late May, we wrote a second blog on Abercrombie & Fitch and its Leader’s Trap (see blog Here). By then, the company had reported a first quarter loss and said that it would have to reduce its prices. We noted in that blog that companies who let their prices stay high for too long take a long time to recapture market share lost in a Leader’s Trap.

The story goes on. In the third quarter of 2009, Abercrombie same-store sales plunged 22%, the eighth consecutive period of sales declines. Profits dropped 39%. The company’s pricing, and some fashion slips, have cost the company dearly. The company has marked down items by 30% to 40%. It is also adding lower-priced clothing and some trendier styles in its stores.

The problem now is the company’s reputation for high prices. By falling into a Leader’s Trap, the company sent some erstwhile loyal customers to competitors such Aeropostale and American Eagle Outfitters. Many of these defecting customers have not come back yet. Some might never come back.

If prices are falling in a marketplace, even high-end, Performance Leader, competitors have to go along, or lose market share. For example, in the tough automobile industry, even BMW and Mercedes have had to offer price and financing incentives to keep sales going. (See “Audio Tip #142: Defensive Pricing Guidelines” on StrategyStreet.com.)

Sony in the Game Business

Sony has just introduced a new PlayStation3. This product comes in a new slim form factor. Its price is $299. This is a 25% reduction from the $399 price of the current model of the PlayStation3. The price cut comes as the PS3 has struggled against its competitors, whose products have carried lower prices. Sony was in a Leader’s Trap.

Not only is the PS3 struggling against lower-priced competitors, it is also facing the head winds of a badly depressed market. Industry sales of game hardware and software are down 29% from a year ago.

The problem? Even at the new price, the product is more expensive than the industry leader. Nintendo’s Wii console sells for $250. The wildly successful Wii sets the price bar for the heart of the market. Its total console sales have passed 20.7MM compared to just over 15.5MM for the Microsoft Xbox and about 7.9M for the PS3. A competing console price higher than $250 really focuses the customer’s attention on the value of the marginal benefits.

Sony justifies the fact that the PS3 will remain the more expensive console because it offers a Blu-Ray player. Customers may not see it that way (see the Perspective, “The Two Greatest Consultants in the World” on StrategyStreet.com). The new PS3 may end up as a high end, Performance Leader, product with limited market share.

Sony has climbed part way out of its Leader’s Trap (see Video #42: Leader’s Trap on StrategyStreet.com) but still has a way to go. You will see more of the same in our next blog.

Pricing Confusion and Its Aftermath

There were a number of articles regarding pricing over the last few days that caught my attention. Whenever a market gets difficult, many competitors, but especially the leaders, can become confused about what to do with their prices. Here are some examples of both effective and ineffective pricing decisions.

Delhaize is a Belgian-based supermarket operator. In the United States it operates Food Lion, Hannaford and the Sweet Bay chains. The company saw its sales grow and market share increase during the second quarter of 2009 because it offered comparatively low prices and pushed its own low-cost private labels. The company’s market share gains came at the expense of competitors who did not emphasize low prices. Among these were Supervalu and Safeway. Both of the latter competitors now pledge to cut prices aggressively.

Unilever has a new Chief Executive, that is, he was new as of January 2009. The previous CEO had held prices relatively high. The new CEO quickly reversed course. The company cut prices all across Europe and sales began to grow. Not by much, but they did grow. And the company gained market share. In contrast, Procter and Gamble saw sales fall in the same period. Part of Unilever’s new low price emphasis is to respond quickly to cheap local brands. For example, in South Africa, the company’s Standard Leader laundry detergent came under attack from a less-expensive local brand. In response, Unilever launched an inexpensive version of its Surf detergent with fewer features. This new Price Leader product effectively countered the inexpensive local brand.

Joseph A. Bank Clothiers has continued to see its revenues and margins increase despite the very tough detail economy. The company sells classic fashions and casual clothing for men. It has always been a promotions-driven company. It cleverly offers selected discounts to keep customers coming into its stores. In the spring, it offered a $199 suit sale and then, recognizing its customers’ fear of job losses, promised to refund the price of the suit, and let the customer keep the suit, if the customer lost his job before July. Suit sales bounded and same store sales grew by more than 4%. The company continues to gain share from department stores and other specialty stores whose pricing is not as sharp.

Note that in each of these three examples, the company gaining share because of its low price would not have been able to do so had the other competitors in the market not allowed them to get away with the lower prices. The competitors who lost share were in a Leader’s Trap. (See the Symptom and Implication “The industry leaders are losing share” on StrategyStreet.com.) There is no good ending for a company in a Leader’s Trap.

Here is an example of pricing acumen from the U.K. grocery industry. A few months ago, Asda, the British unit of Wal-Mart, and Tesco, the industry leader, began reducing prices and issuing new advertising messages stressing their low prices. Within a very short period of time, the other two leading grocery chains, Sainsbury’s and Morrison’s, followed suit. Each of these chains are now emphasizing low low prices and private label products. The result? All four chains are growing and picking up share. The losers are the smaller, independent retailers who simply can not afford to dive to the depths of the discounts offered by the bigger guys. (See the Symptom and Implication “As large competitors match low prices other competitors face difficulties” on StrategyStreet.com.) The U.K. industry’s customers have not defected to discounters. There was no Leader’s Trap in this market as each of the largest competitors matched competitive prices quickly.

For more explanation and examples of the Leader’s Trap, see the Diagnose/Pricing/Price Change Opportunities/Price Discount Opportunities section of StrategyStreet.com.

This Leader's Trap Comes to a Quick End

In February of 2009, we wrote a blog about Abercrombie and Fitch in a Leader’s Trap (see the blog, “A High End Retailer in a Leader’s Trap”). In that blog, we observed that Abercrombie and Fitch refused to discount its products in the marketplace, despite the fact that American Eagle Outfitters and Aeropostale, two of its main competitors, were offering lower prices. We noted that Abercrombie’s market share was falling, while Aeropostale’s was clearly on the rise. We predicted that Abercrombie would have to come out of its Leader’s Trap soon by changing its pricing policy.

Abercrombie has surrendered.

The company reported a larger than expected first quarter loss and said that it planned to lower prices to boost sales. It admitted that this price reduction is a 180 degree change from its previous strategy of keeping prices high through the recession (see the Perspective, “Who has Pricing Power?” on StrategyStreet.com).

Earlier in the year, Abercrombie had argued that price-cutting would increase sales but would destroy its high-end image and the company’s future pricing power (see Video #4: The Risk of Slow Demand Growth on StrategyStreet.com). Competitors saw otherwise. They took advantage of Abercrombie’s high prices. The predictable result is that shoppers deserted the teen retailer for other retailers offering lower prices. Abercrombie then faced an inventory pile-up and a fall-off in sales.

Once customers begin deserting a company because of its high prices, the company’s Leader’s Trap will always come to an end (see Video #42: Leader’s Trap on StrategyStreet.com). When it does end, the company will have lost market share and margin. Some of the market share loss is likely to be long lasting.

Price Leader Expansion Under Standard Leader Umbrella

Over the last year, private label sales of food and other grocery products in the U.S. have grown at over 10% per annum. These private label products are examples of Price Leaders, companies and products who offer performance less than that of the larger, industry-leading, Standard Leaders for a price substantially less than Standard Leaders.

Standard Leaders are the companies and the products that are most common in an industry. Standard Leader products make up the majority of the industry’s sales. A Camry and an Accord would be Standard Leader products. The Yaris and the Fit are Price Leader products.

Private label products rely in the brand name of the retailer to establish Reliability, while offering the consumer Function benefits that are roughly equivalent to the Standard Leader product. Sometimes industry Standard Leaders will produce private label products which are unrelated to their major branded products. More often, though, private label products are produced by private label company specialists, such as Ralcorp and Cott. The majority of these private label food producers are mid-sized private companies. Most are unknown by the average consumer. They include companies such as Schwann’s, Land O’Lakes, Specialty Foods, Sterm Foods and Pan-O-Gold.

In the food business, private label products can put significant pressure on the industry’s Standard Leaders. That is happening today. While private label products have grown 10% in the last year, many of the branded food companies are growing well below that or are shrinking in their sales. ConAgra Foods saw a sales increase due to price increases, but sales volume actually fell. Kraft Foods, General Mills and H.J. Heinz also saw declines in sales volumes.

The reason for the disparities in growth rates between private label products and branded foods is pricing. Last year the branded food companies had a unique opportunity to raise prices dramatically, on the order of 10%, due to the rising commodity prices at the time. However, these commodity prices have come down and the branded food companies have continued to maintain, or even raise prices. With the fall-off in the economy, and these price umbrellas set by the branded food companies, private labels have jumped in popularity. This is a form of the Leader’s Trap. We just placed many examples of the Leader’s Trap on our StrategyStreet web site (see http://www.strategystreet.com/tools/glossary_of_terms /leaders trap and also the Symptom and Implication, “Leaders Stress Quality to Offset Competitors’ Lower Prices” on StrategyStreet.com).

The problem that private labels are creating for the branded food companies is one of improving Functions and Reliability. The increased volume that the branded food companies are allowing private label products enables these Price Leader companies to improve their products, reducing or erasing the Functional and quality differences their products have compared to the branded products. The private label products then become permanently stronger.

This is a serious challenge. J.D. Power & Associates recently reported that consumer perceptions of private label grocery brands have shifted to the positive. Many consumers no longer consider them to be low quality with bland packaging. These consumers look at private label brands as unique and having quality that equals that of traditional brands. The traditional branded companies are setting up powerful competitors who will always maintain a price advantage over them.

These private label store brands are unlikely to lose all the market share they have gained over the past year, once the industry Standard Leaders reduce their prices, as they inevitably will.

The End of a Local Leader's Trap

A Leader’s Trap occurs when an industry leader, usually the first or second company ranked by market share, holds prices high in the face of declining industry prices. The industry leader expects that its customers will remain loyal despite lower cost competition. This decision is virtually certain to fail. Eventually, the industry leader will reduce its prices, but only after losing market share to the lower cost competitor. The North Lake Tahoe ski world is seeing the end of a Leader’s Trap. The world is about to get more interesting for skiers around this area.

Several years ago, one of the largest North Tahoe ski areas, Northstar, developed a ski pass that allowed the pass-holder to ski any day of the week except for Saturday and a few blackout dates around popular holidays. Northstar is a relatively large, well-run resort. While its mountain is fine for families, it is sorely lacking in challenges for the advanced skier. They priced these passes at the equivalent of five or six days’ cost of a regular full day of skiing. As a result of this decision, Northstar gained in popularity. Skiers flocked to the good deal. They skied Northstar on most days and then bought single day tickets at the other ski areas for their Saturday skiing. These pass-holders have been a boon to Northstar (see the Symptom and Implication, “The industry leaders are losing share” on StrategyStreet.com). They bring their friends and family, they buy food and equipment at the village shops and they upgrade the reputation of the resort.

Northstar enjoyed these benefits for the last several years because its two large competitors, Squaw Valley and Alpine Meadows, refused to match their price offering. This was a classic Leader’s Trap. By most accounts, Alpine and Squaw offer a better mountain to skiers. But the prices they charge have caused many skiers to jump ship to Northstar, taking their purchases and buzz benefits with them.

But these days are quickly coming to an end. Squaw Valley has announced new season passes that are very competitive with those at Northstar, and a great deal less expensive than previous season passes. Squaw Valley will now offer a Bronze season pass, good for any day except Saturday and selected blackout dates for $369. Northstar’s equivalent offering is $329. Less expensive, yes, but a whole lot less costly than when Squaw Valley’s adult full-season pass cost $1,449. Squaw Valley also upped the ante. It offers a Silver pass for $469. This pass, which does not have a Northstar equivalent, allows the pass-holder to ski seven days a week, except on selected blackout dates.

This new pricing scheme from Squaw Valley puts a great deal of pressure on all other ski areas in North Lake Tahoe. Alpine Meadows will have to fall in line. Other smaller ski areas, such as Sugar Bowl, Homewood, Incline and Mt. Rose will also have to reduce their prices and offer a season passes with similar benefits. Northstar already is the leader in this pricing approach. It will continue on as it is, though now its price advantage over Squaw has fallen to 11%, from something closer to 75%.

Skiers here may see some additional pricing innovations, such as multiple ski area season passes. Such season passes, at low costs, already exist in Colorado, where a skier can gain access to five separate ski areas, including leaders Vail and Beaver Creek, for a cost that hovers around $500. A season pass granting the pass-holder access to several of the smaller ski areas might be an effective answer to Squaw Valley’s latest initiative.

No matter what happens next, Squaw Valley is out of the Leader’s Trap. It will certainly gain market share next year. (See the Symptom and Implication, “The larger companies are squeezing out the smaller” on StrategyStreet.com.)

The Causes and Symptoms of Overcapacity

Overcapacity, where an industry can produce more than customers currently demand, is the result either of a fall-off in demand or the expansion of competition. During the 80s and 90s, three quarters of the industries that went into overcapacity did so as a result of expansion of competition. Industries such as semiconductors, airlines, mini-computers and even orange juice went into hostility as competitors expanded faster than demand grew.

More recently, though, most of the industries going into overcapacity have suffered from a major fall-off in demand as the world-wide economy slips into recession. Any industry associated with residential building is now in overcapacity, as new housing starts to plummet. Mall owners are suffering as retailers go out of business.

Even very low cost competitors in an industry suffer when the industry goes into overcapacity due to a fall-off in demand. During the 80s, much of the U.S. domestic textile industry shifted off shore to low-cost producers such as India. But in this latest economic crisis, even the Indian textile industry is suffering from overcapacity. Textile employees in India in the least-skilled jobs may earn only $2.00 a day. But many of them are losing their jobs as European and American clothing retailers slash orders.

No matter how an industry enters overcapacity, it will follow a common evolutionary pattern. (See the Perspective, “Success Under Fire: Policies to Prosper in Hostile Times” on StrategyStreet.com.) There are six phases to this evolution:

Phase 1: Margin pressure. Competitors begin discounting to maintain their utilization rates. As a result, prices and margins fall throughout the industry.

Phase 2: Share shifts. Some competitors, often the leaders in the industry, refuse to go along with the price declines spreading throughout the industry. We call this phenomenon the Leader’s Trap. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.) This occurs early in overcapacity and causes significant early share shifts from high-priced to low-priced competitors. Following this early shift in shares, the industry will see additional shifts in shares due to the flight quality from less reliable to more reliable competitors and due to acquisitions.

Phase 3: Product proliferation. The industry floods the market with new products in order to reignite customer demand. These new products include bundling of benefits in an attempt to upgrade the product by adding additional features or functions, and product unbundling, where the innovator seeks to remove product features to reach a new, lower price point.

Phase 4: Self-defeating cost reduction. Inevitably, companies face the need to reduce their costs. The less successful companies reduce costs at the customer’s expense. They do so by conscious decisions leading to feature failure, where the company delays matching popular new product features, quality slippage, where the company does not keep pace with the industry’s quality and delivery standards and distribution conflicts, where manufacturers seek to shift their margin pressure away from themselves on to their channels of distribution.

Phase 5: Consolidation and shake-out. Over time, the industry goes through several waves of consolidation and shake-out where new, stronger companies emerge and weaker firms are absorbed.

Phase 6: Rescue. Once an industry enters overcapacity, it can stay hostile for a number of years. The American automobile industry and the airline industries have been hostile for well over twenty years. An industry is rescued from hostile conditions by demand growth in most cases. The industry demand gradually catches up to industry capacity and prices rise to encourage new investment once again. A few industries see a rescue from the consolidation and rationalizations in the industry that reduce industry competition to three or four players who control more than 80% of the total market. Often, these industries will develop “gentlemanly” competition where true price competition is rare. Industry prices then rise to attractive levels. The industry is no longer in overcapacity because competitors will not discount against one another to use marginal capacity.

Nokia in a Leader's Trap

Recently, Nokia announced that its market share was likely to fall off somewhat in the future because it was refusing to enter into a price war with others in its industry who are discounting. Nokia has decided to stand apart from the discounters in the marketplace. (See the Symptom & Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com. Unfortunately for Nokia, these discounters include the #2 cell phone maker, Samsung, and the #4, LG Electronics. (See the Symptom & Implication, “Price wars are spreading in the industry” on StrategyStreet.com.) The outlook on this decision is grim.

We have seen this same situation many times before. We call it the Leader’s Trap. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.) In a Leader’s Trap, an established industry competitor maintains a price umbrella and cedes share to a discounting competitor in the mistaken belief that customers will stay loyal to the established competitor by paying a premium for his product. Over time, the company in the Leader’s Trap not only loses share, but also sees prices fall to a level near the prices established by the discounting competitor.

Nokia has announced its intention to take market share only when the company believes that the share will be sustainably profitable in the long-term. This sounds good, but won’t work. The market share the company surrenders today generates cash and, probably, profits. The major players who are discounting their prices today are, therefore, becoming stronger with the addition of more revenues and cash flows in a difficult market. On the other hand, Nokia can only become weaker. It loses cash flows. It broadcasts to all customers in the marketplace that its prices are high. How does Nokia win in this situation?

The answer: it does not. Nokia is unlikely to succeed where previous leaders, such as GM, IBM, AT&T, and many others, have failed. The Leader’s Trap always weakens the company holding the price umbrella and strengthens all the competitors underneath the umbrella. Nokia is sure to regret this tactic.