What is the important lesson learned about competition from this story of Alamo? Explain some ways how Alamo can gain competitive advantage? Describe how negative sum game was shown in this case.
CASE ANALYSIS. Read the case and answer the questions concisely, using all the knowledge learned in the modules. Open modules.
- Alamo Car Rentals
In the early 1990s, Alamo was the most profitable (as a percentage of sales) and fastest growing rental car company in America, despite being only the fifth largest. Its low-cost operating model enabled it to dominate leisure rental markets such as Florida and Hawaii. But Alamo’s management was impatient for growth and had the cash to pursue it. Within the United States, the largest and most lucrative rental car segment was business travel that originated at airports. Alamo figured that even if it could win only a small share of that market by undercutting the rates offered by Hertz and Avis, it could generate a lot of profit given its low overhead costs per car.
That was not to be, for reasons that in retrospect were entirely predictable. Alamo succeeded in pursuing individual, budget-conscious business travelers, but not the large corporate accounts that comprised the most volume. Alamo had neither the facilities nor the experience to woo and satisfy business travelers who wanted first and foremost a quick getaway. Alamo’s success was built on its capacity and expertise at handling large crowds that arrived on charter flights and in tour groups. Its high profits reflected its low overhead costs to serve that segment.
Still, in 1992, Alamo slashed rates and began moving to on-airport locations in cities beyond its core markets. In doing so, Alamo underestimated its own vulnerability. Hertz and Avis had apparently realized that they knew nothing about serving large tour groups efficiently, nor did they want them creating backlogs that would frustrate their valuable business clientele. But once Alamo began using its profit to attack their market, it was bound to prompt a response. The response was swift. Within two years, Hertz opened the largest car rental facility in the world in Alamo’s biggest market, Orlando, Florida, with 66 counters and luggage-transfer stations that made life easier for tourists with lots of stuff in tow. To fill this facility, Hertz began undercutting Alamo’s deals with European tour operators, who proved much more willing to switch suppliers to save a few dollars per car than were Hertz’s corporate business customers that Alamo was trying to woo. That year, Alamo’s profits fell into the red. The company was sold the next year.
(Nagle, T.T., Muller (2018) The Strategy and Tactics of Pricing, Routledge, New York)
Questions:
- What is the important lesson learned about competition from this story of Alamo?
- Explain some ways how Alamo can gain competitive advantage?
- Describe how negative sum game was shown in this case.
- Describe some positive sum game strategies that Alamo could have used?
- How did the competitors of Alamo react to the price competition by Alamo? Did they Attack, Ignore, Defend, Accommodate? Do you think they made the right move? Explain.
- Comment on the ethical concerns with these actions.
- Name any legal concern for this case.
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