Perhaps the single most important concept in planning and exe-cuting offensive or defensive competitive moves is the concept of commitment. Commitment can guarantee the likelihood, speed, and vigor of retaliation to offensive moves and can be the cornerstone of defensive strategy. Commitments influence the way competitors per-ceive their positions and those of rivals. Establishing commitment is essentially a form of communicating the firm‘s resources and inten-tions unequivocally.6 Competitors face uncertainty about a firm’s intentions and the extent of its resources. Communicating commit–ment reduces the uncertainty and causes the players to calculate their rational strategies from new assumptions, which avoids warfare. For example, if a firm can commit itself unequivocally to vigorously re-pulsing a given move, its competitors may take this reaction as a cer-tainty rather than a probability in formulating their own strategies. They are thus less likely to act in the first place. The trick in com-petitive interactions is to stake out commitments in such a way as to maximize the firm‘s own market position.
There are three major types of commitment in the competitive setting, each designed to achieve deterrence of a different type:
- commitment that the firm is unequivocally sticking with a move it is making;
- commitment that the firm will retaliate and continue to retali-ate if a competitor makes certain moves;
- commitment that the firm will take no action or forgo an ac-tion.
If the firm can convince its rivals that it is commited to a strate-gic move it is making or plans to make, it increases the chances that rivals will resign themselves to the new position and not expend the resources to retaliate or try to cause the firm to back down. Thus commitment can deter retaliation. The more entrenched and stub-born the firm appears in its intentions to carry out a move, the more likely this outcome is. If competitors perceive a grim and committed competitor, they may be convinced that if they retaliate the competi-tor will countermove to keep its new position, and so on in a down-ward spiral.
The second form of commitment is analogous, but it relates to a firm‘s reaction to possible initiatives by competitors. If the firm can convince its rivals that it will retaliate strongly and with certainty to their moves, they may conclude that it is not worth making the move at all. This role of commitment is to deter threatening moves in the first place. The more competitors perceive the prospect of dogged, bitter retaliation to the point of severely hurting everyone’s profits, the less likely they are of initiating the chain of events in the first place. This is analogous to the situation in which the robber says, “stick ‘em up, I want your money,” and the deranged-looking vic-tim says “If you take it, I will explode this bomb and kill us both! “
The third form of commitment, that of not taking a damaging action, might be termed creating trust. This form of commitment can be important in deescalating competitive battles. For example, if the firm can convince its rivals that it will follow a price increase rather than attempt to undercut it, it may help stop a price war.
The persuasiveness of a commitment is related to the degree to which it appears binding and irreversible. The value of a commit-ment is as a deterrent, and deterrent value increases with the certain-ty with which the competitor sees the commitment being honored. The irony is that if the deterrent fails, the firm may be sorry it has made the commitment (the victim doesn’t really want to blow him-self up). The firm faces the difficult trade-off of reneging on its com–mitment, reducing its credibility in subsequent situations, or paying the price of fulfilling the commitment.
Both the fact of a commitment and its timing are crucial. The firm that can commit itself first may be in the position to make other firms take its behavior as given in their maximizing calculations about what to do, thereby skewing the outcome in its favor. This can be especially effective when firms basically are seeking a stable out-come but disagree on its precise form. When two firms are locked in a vigorous battle for position and have widely divergent interests, early commitment may be less helpful.7
1. COMMUNICATING COMMITMENT
Communicating commitment, either to pursue a move or to re-taliate against a competitor’s action, can be done through a variety of mechanisms and with a variety of signaling devices. The building blocks of a credible commitment are the following:
- assets, resources, and other mechanisms to carry out the com mitment quickly;
- a clear intention to carry out the commitment, including a history of adherance to past commitments;
- inability to back down or perceived moral resolve not to back down;
- ability to detect compliance to the terms to which the commit-ment refers.
The necessity of having the mechanisms to carry out a commit-ment in order to communicate its seriousness is obvious. If a firm appears unbeatable, a battle is unlikely to occur. Particularly visible assets for carrying out commitments are excess cash reserves, excess production capacity,8 a large corps of salespersons, extensive re-search facilities, small positions in a competitor’s other businesses which can be used in retaliation, and fighting brands. Less visible as-sets are such things as on-the-shelf but unintroduced new products which are set to go directly against a competitor’s key market. Disci-pline mechanisms is a term applied to such assets or resources, which are intended to punish a competitor if it makes a move undesirable from the point of view of the firm. Many of the assets listed above can be effective discipline mechanisms.
The building of such assets to carry out a commitment can play an important role in establishing commitment. Mere possession of the assets is not enough, however. Competitors must know about their presence for them to have deterrent value. Insuring that com-petitors are aware of the assets to carry out commitments sometimes involves public announcements, discussions with customers that will spread around the industry, and cooperation with the business press to the point of producing articles noting the existence of such assets. Highly visible resources are particularly valuable as deterrents since they minimize the risk of being misread or ignored by competitors.
The clear intention to carry out a commitment must similarly be communicated for a commitment to be credible. One way to do so is through a pattern of consistent behavior. The past is usually used by competitors as an indication of how reliable and tough a firm is like-ly to be in its reactions, and a well–orchestrated series of past reac-tion (which may be on less important or even trivial matters) can be a persuasive signal of future intentions. The clear intention to carry out a commitment is also enhanced by noticeable actions that reduce the lag in retaliating, like defensive R&D programs already under-way which are known to competitors. Announcements or leaks of the intention to carry out a commitment are also communicating de-vices, although they do not usually communicate with the serious-ness of past behavior.
Extremely effective in communicating commitment are known factors that make it difficult and costly if not impossible for the firm to back down. For example, a publicized long-term contract with a supplier or customer is an indication of a long-run stake in trying to enter and stay in a market. So is buying a plant rather than leasing it, or entering a market as a fully integrated producer rather than just an assembler. Commitment to retaliate to a competitor’s moves can be made irreversible by written or verbal agreements with retailers or customers to meet price cuts, guarantees of an equivalent quality product, cooperative advertising support to meet a competitor’s ac-tion, and so on. Declaring commitments to the industry or financial community in public statements, publicizing targets for market share, and a variety of other devices can let competitors know that a firm will be embarrassed publicly if it has to back down. This knowl-edge will tend to deter them from trying to force it to do so.
Pursuing this line of thinking, the more the competitor thinks the firm is bordering on being irrational in pursuing its commitment, the more wary it will be in taking that firm on. Irrationality is com–municated in competitive situations by such things as past actions, lawsuits, and public statements. Behavior that tells competitors the firm is serious can occur in all parts of a business. What is said to suppliers, to customers, to distribution channels, and in public can communicate more or less seriousness about being in the business or about sticking to a commitment for the long haul.
It is important to note that great resources are not always neces-sary for commitment to be communicated. The firm with a large market share or broad product line, for example, will usually have conflicting goals in retaliating to some moves, as previously dis-cussed. The small firm, however, may have much to gain and little to lose by initiating a move or by retaliating to others’ moves. A price cut the firm initiates may have an enormous impact on the large competitor, given that competitor’s higher volume, for example. Al–though the smaller firm has fewer resources to carry out its threats, it can also partially compensate through toughness or irrationality.
Finally, the ability of a firm to detect compliance is central to the effectiveness of its commitment to retaliate. If a competitor be-lieves it can “cheat” and go undetected, it may be tempted to do so. But if the firm can demonstrate its ability to know immediately of any price shading, quality adjustments, or forthcoming new prod-ucts, for example, its commitment to retaliate becomes more credi-ble. Known systems of monitoring sales, talking to customers, and for interviewing distributors are examples of ways to communicate a high probability of detection. It should be noted that buyers may have the incentive to report secret price cuts even if they do not ac-tually occur in order to encourage discounting. This can undermine the stability of a market where information is poor or suppliers can-not verify buyer claims.
An evolving competitive battle involving Baxter Travenol Lab-oratories in intravenous solutions, blood containers, and related dis-posable health care products is an interesting example of some of these ideas about commitment.9 Baxter ($800 million), in a strong market position, faces a challenge from the McGaw division of American Hospital Supply Corporation ($1.5 billion), developer of a new container for intravenous solutions. Although the Food and Drug Administration had not given its approval to the new compet–itive product as of November 1977, Baxter reportedly had already begun to take action to communicate its commitment to resist the en-try. Hospital purchasing agents were reporting increased price com-petition. Baxter was reported to be offering large discounts on many lines and was going especially hard after McGaw accounts. Baxter also had been spending heavily on research and had engaged in re-portedly vicious price cutting when another competitor entered the market in the early 1970s. Baxter’s toughness and resolve in meeting this recent competitive challenge has apparently been well communi-cated.
2. TRUST AS A COMMITMENT
Our discussion has focused on communicating commitment to stick with a move or to retaliate, but in some situations firms find it desirable to make commitments to not make a damaging move or to end aggression. Although this course may seem easy, competitors are usually wary of a firm‘s conciliatory gesture, especially if they have been stung by that firm in the past. They may also be wary if letting down their guard gives the initiating firm a chance of getting a jump on them that is hard to recoup. How, then, do firms actually go about communicating conciliation or building trust?
Once again the range of possibilities observed in practice is large, and the principles already described in communicating com-mitment apply. A persuasive way to communicate trustworthiness is for the firm to demonstrably take some diminution in its perform-ance that accrues to the benefit of competitors. For example, there is substantial evidence that General Electric yielded market share in cyclical downturns in the turbine generator business to avoid severe price deterioration and took the share back in cyclical upturns.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.