Industry Instability: The Likelihood of Competitive Warfare

The first question for the firm in considering offensive or defen-sive moves is the general degree of instability in the industry or the industry-wide conditions that may mean a move will touch off wide-spread warfare. Some industries require much softer treading than others. The underlying structure of an industry, discussed in Chapter 1, determines the intensity of competitive rivalry and the general ease or difficulty that cooperative or warfare-avoiding outcomes can be found. The greater the number of competitors, the more equal their relative power, the more standardized their products, the higher their fixed costs and other conditions that tempt them to try to fill capacity, and the slower the industry’s growth, the greater is the likelihood that there will be repeated efforts by firms to pursue their own self-interest. They will take actions like shading prices (squealing), where almost sure retaliation will touch off recurring bouts of retaliation that keep profits low. Similarly, the more diverse or asymmetrical are competitors’ goals and perspectives, the greater their strategic stakes in the particular business and the less seg-mented the market, the harder it will be to properly interpret each others’ moves and sustain a cooperative outcome. Broadly speaking, both offensive and defensive moves are more risky if these conditions favor intense rivalry.

Some other conditions in an industry can make outbreaks of ri-valry more or less likely. A history of competing or continuity of in-teraction among the parties can promote stability since it facilitates the building of trust (the belief that competitors are not out to bank-rupt each other), and leads to more accurate forecasts of how com-petitors will react. Conversely, lack of continuity will raise the chances of competitive outbreaks. Continuity of interaction not only depends on a stable group of competitors but also is aided by a stable group of general managers of these competitors.

Multiple bargaining areas, or situations in which firms are inter-acting in more than one competitive arena, can also facilitate a sta-ble outcome in an industry. For example, if two firms compete in both the U.S. and European markets, one firm‘s gain in the U.S. market might be offset by the other firm‘s gains in Europe, gains which neither firm would tolerate individually. Multiple markets provide a way in which one firm can reward another for not attack-ing it,2 or conversely, provide a way of disciplining a renegade. In-terconnections through joint ventures or joint participations can also promote stability in an industry through fostering a cooperative ori-entation and exposing the players to fairly complete information about each other. Full information is usually stabilizing because it helps firms avoid mistaken reactions and keeps them from attempt-ing ill-advised strategic initiatives.

Industry structure influences the position of the competitors, the pressures on them to make aggressive moves, and the degree to which their interests are likely to conflict. Structure thus sets the basic parameters within which competitive moves are made. How-ever, structure does not fully determine what will take place in a market. Rivalry also depends on the particular situations of individ-ual competitors. Another step in assessing industry instability and the general context for making moves is competitor analysis. Using the techniques described in Chapter 3, it is necessary to examine the probable moves each competitor will make, the threat provided by moves made by its rivals, and the ability of each competitor to de-fend itself effectively against such moves. This analysis is a prerequi-site to developing strategies for deterrence or in deciding where and how to make offensive moves. Here it will be assumed that such analysis has already been done.

The final part of assessing industry instability is determining the nature of the information flow among firms in the market, including the extent of their shared knowledge of industry conditions, and ability to communicate intentions effectively through signaling. This flow of information will be a central focus of this chapter.

Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.

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