Because in an oligopoly a firm is partly dependent on the behav-ior of its rivals, selecting the right competitive move involves finding one whose outcome is quickly determined (no protracted or serious battle takes place) and also skewed as much as possible toward the firm‘s own interests. That is, the goal for the firm is to avoid desta-bilizing and costly warfare, which spells poor results for all partici-pants, but yet still outperform other firms.
One broad approach is to use superior resources and capabilities to force an outcome skewed toward the interests of the firm, over-coming and outlasting retaliation—we might call this the brute force approach. This sort of approach is possible only if the firm possesses clear superiorities, and it is stable only as long as the firm maintains these superiorities and as long as competitors do not misread them and incorrectly attempt to change their positions.
Some companies seem to view competitive moves as entirely a game of brute force: sheer resources are massed to attack a rival. A firm‘s strengths and weaknesses (Chapter 3) certainly help define the opportunities and threats it faces. However, even sheer resources are often not enough to insure the right outcome if competitors will be tough (or worse, desperate or seemingly irrational) in their responses or if competitors are pursuing greatly different objectives. More-over, possession of clear strengths is not always realistically avail-able to every firm seeking to improve its strategic position. Finally, even with clear strengths, a war of attrition is costly to the victor and vanquished alike and is best avoided.
Competitive moves are also a game of finesse. The game can be structured and moves selected and executed in such a way as to maxi-mize their outcome no matter what resources are available to the firm. Ideally, a battle of retaliation never begins at all. Making com-petitive moves in oligopoly is best thought of as a combination of whatever brute force the firm can muster, applied with finesse.
1. COOPERATIVE OR NONTHREATENING MOVES
Moves that do not threaten competitors’ goals are a place to be-gin in searching for ways to improve position. Based on a thorough analysis of competitors’ goals and assumptions, using the frame-work in Chapter 3, there may be moves the firm can make to in-crease its profits (or even its share) that do not reduce the perform-ance of its significant competitors or threaten their goals unduly. Three categories of such moves can be usefully distinguished:
- moves that improve the firm‘s position and improve competi tors’ positions even //they do not match them;
- moves that improve the firm‘s position and improve competi tors’ positions only if a significant number match them;
- moves that improve the firm‘s position because competitors will not match them.
The first case involves the least risk if such moves can be identi-fied. One possibility is that the firm may be engaged in practices that not only diminish its performance but also spill over to diminish the performance of competitors, such as an inappropriate advertising campaign or poor pricing structure out of line with the industry. The existence of such possibilities is a reflection of weak past strategy.
The second case is more common. In most industries, there are moves that would improve everybody’s situation if all firms fol-lowed. For example, if every firm reduced its warranty from two years to one year, all the firms’ costs would fall and profitability would increase, provided that aggregate industry demand was not sensitive to warranty terms. Another example is a change in costs that calls for a price adjustment. The problem with such moves is that all firms may not follow, because the move, though improving their positions absolutely, is not optimal for them. For example, the firm with the highest product reliability will lose a competitive ad-vantage if the warranty period is reduced. Competitors also may not follow because one or more firms see the chance to improve their rel-ative position by not following, assuming that others do follow.
In selecting a move of this second type, the key steps are (1) as-sessing the impact of the move on each and every major competi-tor, and (2) assessing the pressures on each competitor to forego the benefits of cooperating for the possible benefits of breaking ranks. This assessment is a problem in competitor analysis. When making moves whose success is contingent on competitors following, the risk is that competitors will not follow. This risk is not great if the chosen move can be cheaply rescinded or if shifts in relative company posi-tion are either slow to occur or easy to redress. However, such a move can be very risky if the relative positions potentially gained by firms that choose not to participate are significant and hard to win back.
Identifying the third category of nonthreatening moves—moves that competitors will not follow—depends on a careful understand-ing of the opportunities provided by competitors’ particular goals and assumptions. It involves finding moves to which competitors will not respond because they do not perceive a need to do so. For example, a competitor may attach little significance to the Latin American market, focusing instead on Canada as an export opportu-nity. Inroads into Latin America at the expense of local companies may not matter at all to this competitor.
Moves will be perceived as nonthreatening if:
- competitors do not even notice, because the adjustments are largely internal for the firm making them;
- competitors will not be concerned about them because of their self-perceptions or assumptions about the industry and how to compete in it;
- competitors’ performance is impaired little if at all measured by their own criteria.
An example of a move combining a number of these character-istics was Timex’s entry into the watch industry in the early 1950s.3 Timex’s entry strategy was to produce a very low-price watch (with-out jeweled bearings), which was so inexpensive that it did not pay to have it repaired. This watch was sold through drugstores and other nonconventional watch outlets instead of through jewelry stores. The Swiss dominated the world watch industry at the time with high- quality, high-priced watches sold through jewelry stores and mar-keted as precision instruments. The Swiss industry was growing briskly in the early 1950s. The Timex watch was so different from the Swiss watch that the Swiss did not seem to perceive it as competi-tion at all. It did not threaten their image of quality, nor did it threaten their position with jewelers or as the leading producers of high-quality, high-priced watches. The Timex watch probably cre-ated primary demand initially, rather than taking sales from the Swiss. Furthermore, the Swiss were growing, and Timex was no threat to their performance at all initially. As a result, Timex was able to gain a secure foothold in the lower end of the market without even attracting the attention of the Swiss.
Executing moves so as to improve everyone’s position requires that competitors understand that the move is not threatening. Such moves can be a common and recurring adaptation necessary because of changed industry conditions. Yet all three categories of non- threatening moves involve some risk that the move may be misinter-preted as aggression.
Firms can use a wide variety of mechanisms to avoid misin-terpretation in such situations, though none is foolproof. Active market signaling (Chapter 4) through announcements, public com-mentary about the change, and the like is one option in indicating benign intentions. For example, an elaborate discussion in the press of cost increases that justify making a price change may help com-municate intentions. The firm making such a move also can disci-pline competitors who fail to follow, such as through selective adver-tising campaigns or selling efforts directed at those competitors’ customers. Another approach to easing risks of misinterpretation is reliance on a traditional industry leader. In some industries, one firm historically takes the leadership role in adjusting to new condi-tions; other firms wait for it to move first and then follow. Another mechanism is to associate prices or other decision variables to some readily visible index, such as the consumer price index, to facilitate adjustments. Focal points, to be discussed below, are a coordinating mechanism that can also be employed.
2. THREATENING MOVES
Many moves that would significantly improve a firm‘s position do threaten competitors, since this is the essence of oligopoly. Thus a key to the success of such moves is predicting and influencing retalia-tion. If retaliation is rapid and effective, then such a move may leave the mover no better off or even worse off. If retaliation is very bit-ter, the initiator can actually come out a lot worse off than it started.
In considering threatening moves, the key questions are as fol-lows:
- How likely is retaliation?
- How soon will retaliation come?
- How effective will retaliation potentially be?
- How tough will retaliation be, where toughness refers to the willingness of the competitor to retaliate strongly even at its own expense?
- Can retaliation be influenced*!
Because the framework for competitor analysis in Chapter 3 ad-dresses a number of these questions, we will concentrate our atten-tion here on predicting lags in retaliation to offensive moves. Many of these considerations can be turned around to help develop defen-sive strategy. Influencing retaliation will also be discussed in the sec-tion on commitment later in this chapter.
3. LAGS IN RETALIATION
Other things being equal, the firm will want to make the move that gives it the most time before its competitors can effectively re-taliate. In a defensive context, the firm will want competitors to be-lieve that it will retaliate quickly and effectively to their moves. Lags in retaliation stem from four basic sources:
- perceptual lags;
- lags in mounting a retaliatory strategy;
- inability to pinpoint retaliation, which raises its short-run cost;
- lags caused by conflicting goals or mixed motives.
The first source, perceptual lags, involves delay in competitors perceiving or noticing the initial strategic move, either because the move was kept secret or introduced quietly away from competitors’ centers of attention (e.g., with small customers or foreign custom-ers). Sometimes, by being secretive or keeping a low profile, a firm can make a move or build a new capability before competitors can effectively retaliate. Also, competitors may not immediately per-ceive a move as significant because of their goals, perceptions of the marketplace, and so on. The example of the introduction of the Timex watch serves here as well. Long after Timex began to cut into the sales of the Swiss and American producers, the Timex watch was seen by them as an inferior junk product not requiring retaliation.
Perceptual lags depend partly on the mechanisms firms have in place for monitoring competitive behavior, and these lags can be in-fluenced. When competitors are dependent on outside statistical sources like trade associations to provide the base data against which they compute market share, then they may not be able to notice moves until such data are published. Perceptual lags may sometimes be lengthened by diversionary tactics, such as introducing a product or making some other move in an area away from that in which the key initiative is to take place. From a defensive point of view percep-tual lags may be shortened by having a competitor monitoring sys-tem in place which continually assembles data from the field sales- force, distributors, and so on. With careful monitoring, competitors can actually learn about moves ahead of time because the competitor must make advance commitments for advertising space, equipment delivery, and the like. If systems for competitor monitoring are known to competitors, all the better for deterrence.
Lags in mounting a retaliatory campaign vary with the type of initial move. Retaliation to a price cut can be immediate, but it may take years for a defensive research effort to match a product change or for modern capacity to be put on stream to match a competitor’s new plant. A new automobile model requires three years from plan-ning to introduction, for example. A large, modern blast furnace for producing pig iron or an integrated papermaking plant requires three to five years to build.
These lags in retaliation can also be influenced by a firm‘s ac-tions. A firm can pick offensive moves against which competitors face a slow process of mounting effective retaliation, given natural lead times coupled with internal weaknessses. From a defensive standpoint, retaliation time can be shortened by building up retalia-tory resources even though they may never be used. For example, new product offerings may be developed but held in reserve, machin-ery can be ordered at the risk of modest cancellation payments, and soon.
Lags caused by the inability to pinpoint retaliation are analo-gous to the problem of having to disassemble an entire television set to replace one faulty transistor. Particularly for larger firms reacting to moves by smaller ones, retaliatory moves may have to be general–ized to all customers rather than restricted to the customers or mar-ket segments that are being contested. For example, to match a price cut by a small competitor, a large firm may have to give a price dis-count to all its customers, at enormous expense. If a firm can find moves that are much less costly for it to make than they are for its competitors to respond to, it can produce lags in retaliation and sometimes even deter retaliation altogether.
Lags in retaliation caused by conflicting goals or mixed motives are a final important situation which has wide applicability in the study of competitive interaction. This is the situation, introduced in Chapter 3, in which one firm makes a move that threatens some of a competitor’s business, but if the competitor retaliates quickly and vigorously, it hurts itself elsewhere in its business. This effect poten-tially creates a lag in retaliation (and a reduction in its effectiveness) or even prevents retaliation altogether. Part of the lag may be in the extra time needed to thrash out internal conflicts.
Finding a situation that catches the key competitor or compet–itors with conflicting goals is at the heart of many company suc-cess stories. The slow Swiss reaction to the Timex watch provides an example. Timex sold its watches through drugstores, rather than through the traditional jewelry store outlets for watches, and empha-sized very low cost, the need for no repair, and the fact that a watch was not a status item but a functional part of the wardrobe. The strong sales of the Timex watch eventually threatened the financial and growth goals of the Swiss, but it also raised an important dilem-ma for them were they to retaliate against it directly. The Swiss had a big stake in the jewelry store as a channel and a large investment in the Swiss image of the watch as a piece of fine precision jewelry. Ag-gressive retaliation against Timex would have helped legitimize the Timex concept, threatened the needed cooperation of jewelers in selling Swiss watches, and blurred the Swiss product image. Thus the Swiss retaliation to Timex never really came.
There are many other examples of this principle at work. Volks-wagen’s and American Motor’s early strategies of producing a stripped-down basic transportation vehicle with few style changes created a similar dilemma for the Big Three auto producers. They had a strategy built on trade-up and frequent model changes. Bic’s recent introduction of the disposable razor has put Gillette in a diffi-cult position: if it reacts it may cut into the sales of another product in its broad line of razors, a dilemma Bic does not face.4 Finally, IBM has been reluctant to jump into minicomputers because the move will jeopardize its sales of larger mainframe computers.
Finding strategic moves that will benefit from a lag in retalia–tion, or making moves so as to maximize the lag, are key principles of competitive interaction. However, seeking to delay retaliation cannot be made a principle of strategy without qualification. A slow but tough retaliation may leave the initiating firm worse off than a quick but less effective one. Thus to the extent that there is a trade-off between the lag in retaliation and the effectiveness and toughness of that retaliation, the firm will have to balance the two in selecting a move.
4. DEFENSIVE MOVES
Thus far we have been talking about offensive moves, but the need to deter or defend against moves by competitors can be equally important. The problem of defense, of course, is the opposite of the problem of offense. Good defense is creating a situation in which competitors, after doing the analysis described above or actually at–tempting a move, will conclude that the move is unwise. As with of-fensive moves, defense can be achieved by forcing competitors to back down after a battle. However, the most effective defense is to prevent the battle altogether.
To prevent a move, it is necessary that competitors expect retali-ation with a high degree of certainty and believe that the retaliation will be effective. Some approaches to achieving this effect have been discussed and others will be introduced as part of the generalized concept of creating commitment, discussed below.
Even if a move cannot be prevented, however, there are some other approaches to defense,
DISCIPLINE AS A FORM OF DEFENSE
If a competitor makes a move and the firm immediately and surely retailiates against it, this disciplining action can lead the ag-gressor to expect that retaliation will always occur. The more the dis-ciplining firm is able to aim its retaliation specifically at the initiator, and the more it can communicate that its target is the initiator rather than any other firm, the more effective such discipline is likely to be. For example, a fighting brand which is a copy of a particular com-petitor’s product is more effective discipline than a more generalized new product.5 Conversely, if the retaliation must be generalized (e.g., a price cut that applies to all customers and not just those shared with the initiating price cutter), the more expensive and less effective the discipline is likely to be. Also, when the response to a move must be generalized rather than focused on the firm initiating the battle, retaliation runs a greater risk of starting a chain reaction of moves and countermoves—which makes discipline more risky.
DENYING A BASE
Once a competitor’s move has occurred, the denial of an ade-quate base for the competitor to meet its goals, coupled with the ex-pectation that this state of affairs will continue, can cause the com-petitor to withdraw. New entrants, for example, usually have some targets for growth, market share, and ROI, and some time horizon for achieving them. If a new entrant is denied its targets and be-comes convinced that it will be a long time before they are met, then it may withdraw or deescalate. Tactics for denying a base include strong price competition, heavy expenditures on research, and so on. Attacking new products in the test–market phase can be an effective way to foretell a firm‘s future willingness to fight and can be less ex-pensive than waiting for the introduction to actually occur. Another tactic is using special deals to load customers up with inventory, thereby removing the market for the product and raising the short– run cost of entry. It can be worth paying a substantial short-run price to deny a base if a firm‘s market position is threatened. Essen-tial to such a strategy, however, is a good hypothesis about what a competitor’s performance targets and time horizon are.
An example of such a situation may be Gillette’s withdrawal from digital watches. Although claiming it had won significant mar-ket shares in test markets, Gillette bowed out, citing the substantial investments required to develop technology and margins lower than those available in other areas of its business. Texas Instruments’ strategy of aggressive pricing and rapid technological development in digital watches probably had a substantial impact on this decision.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.