Market signals can have two fundamentally different functions: they can be truthful indications of a competitor’s motives, inten-tions, or goals or they can be bluffs. Bluffs are signals designed to mislead other firms into taking or not taking an action to benefit the signaler. Discerning the difference between a bluff and a true signal can often involve subtle judgments.
Market signals take a variety of forms, depending on the partic-ular competitor behavior involved and the medium employed. In dis-cussing different forms of signals, it will be important to indicate how they may be used as bluffs, and how a bluff and a true signal might be distinguished.
The important forms of market signals are as follows:
1. PRIOR ANNOUNCEMENTS OF MOVES
The form, character, and timing of prior announcements can be potent signals. A prior announcement is a formal communication made by a competitor that it either will or vv/7/ not take some action, such as building a plant, changing price, and so on. An announce-ment does not necessarily insure that an action will be taken; an-nouncements can be made that are not carried out in practice, either because nothing was done or a later announcement nullified the ac-tion. This property of announcements adds to their signaling value, as will be discussed.
In general, prior announcements can serve a number of signal-ing functions that are not mutually exclusive. First, they can be at-tempts to stake out a commitment to take an action for the purposes of preempting other competitors. If a competitor announces a major new capacity addition which is sufficient to meet all expected indus-try growth, for example, it may be trying to dissuade other firms from adding capacity, which would lead to industry overcapacity.
Or as has been typical of IBM, a competitor may announce a new product well before it is ready for the marketplace, seeking to get buyers to wait for its new product rather than buy a competitor’s product in the interim.2 Berkey, for example, has charged in its anti-trust suit against Kodak that Eastman Kodak disclosed new camera products far in advance of production to discourage sales of compet-ing products.
Second, announcements can be threats of actions to be taken if a competitor follows through with a planned move. If firm A learns of competitor B’s intentions to lower its price on selected items in the product line (or competitor B announces such intentions), for exam-ple, then firm A might announce the intention to lower its price sig-nificantly below B’s. This may deter B from going through with the price change, because B now knows that A is unhappy with the lower price and is willing to start a price war.
Third, announcements can be tests of competitor sentiments, taking advantage of the fact that they need not necessarily be carried out. Firm A might announce a new warranty program to see how others in the industry will react. If they react predictably, then.4 will follow through with the change as planned. If competitors send sig-nals of displeasure or announce somewhat different warranty pro-grams than A has proposed, then A might either withdraw the planned move or announce a revised warranty program to match that of its competitors.
This sequence of actions suggests a fourth role of announce-ments related to their role as threats. Announcements can be a means of communicating pleasure or displeasure with competitive developments in the industry.3 Announcing a move that falls in line with a competitor‘s move might indicate pleasure, whereas announc-ing a punishing move or a substantially different approach to the same end can indicate displeasure.
A fifth and common function of announcements is to serve as conciliatory steps aimed at minimizing the provocation of a forth-coming strategic adjustment. The announcement seeks to avoid hav-ing a strategic adjustment touch off a round of unwelcomed retalia-tion and warfare. For example, firm A might decide that price levels need to be adjusted downward in the industry. Announcing this move well ahead of time, and justifying it in terms of specific changes in costs, can avoid having firm B read the price change as an aggressive bid for market share and retaliating vigorously. This role of announcements is particularly common when a necessary strate-gic adjustment is not meant to be aggressive. However, announce-ments like these can also be designed to lull competitors into a sense of security in order to facilitate the implementation of an aggressive move. This is one of many instances when a signal can be a double- edged sword.
A sixth function of announcements is to avoid costly simulta-neous moves in areas like capacity additions, where bunching of new plant additions would lead to overcapacity. Firms might announce expansion plans well in advance, facilitating the scheduling of capac-ity additions by competitors in a sequence that will minimize overca-pacity.4
A final function of announcements can be communication with the financial community, for purposes of boosting stock price or im-proving the reputation of the company. This common practice means that firms often have a public relations motive in presenting their situation in the best possible light. Announcements of this char-acter can cause trouble by sending inappropriate signals to compet-itors.
Announcements can also sometimes serve the purpose of coa-lescing internal support for a move. Committing the firm to do something publicly can be a way of cutting off internal debate about its desirability. Announcements of financial goals not infrequently serve this function of rallying support.
It should be clear from the above discussion that an entire com-petitive battle can be waged through announcements before a single dollar of resources is expended. A fairly recent sequence of an-nouncements among producers of computer memories provides an illustration of this occurrence. Texas Instruments announced a price for random access memories to be available two years hence. One week later, Bowmar announced a lower price. Three weeks later, Motorola announced an even lower price. Finally, two weeks after this, Texas Instruments announced a price of half of Motorola’s, and the other firms decided not to produce the product. Thus, before any major investments were actually made, Texas Instruments had won the battle.5 Similarly, trading announcements back and forth can settle the size of a price change or form of a new dealer rebate program without the need to disrupt the market and risk a battle by actually introducing one scheme and then having to change or with-draw it later.
Discerning whether a prior announcement is an attempt at pre-emption or is a conciliatory move is obviously a crucial distinction to make correctly. A place to start in making such a distinction is with an analysis of the lasting benefits that might accrue to the competi-tor from preemption.6 If there are such lasting benefits, a preemp-tive motive must be taken as a strong possibility. If there are few benefits from preemption, on the other hand, or if the competitor acting in its narrow self-interest could have done better through a surprise move, then conciliation may be indicated. An announce-ment that discloses an action much less damaging to others than it might have been, given the competitor’s capabilities, may usually be viewed as conciliatory. Another clue to motives is the timing of the announcement relative to when the action is set to occur. Announce-ments far in advance of a move tend to be conciliatory, other things being equal, though it is difficult to generalize completely.
It should be clearly noted that announcements can be bluffs, be-cause they need not always be carried out. As described, an an-nouncement can be a way to communicate a firm‘s commitment to carrying out a threat for purposes of causing a competitor to either back down from or tone down a move or to not initiate it in the first place. For example, a firm can announce a large plant designed to maintain its share of industry capacity in the face of other capacity announcements it seeks to have cancelled, where the effect of its plant will be to create major overcapacity in the industry. If a bluff for these purposes fails, there may be little incentive for the bluffer to carry out the threat. However, whether or not a threat or other commitment is carried out has critical implications for the credibility of future commitments and future announcements. In extreme cases an announcement can be a bluff designed to trick competitors into expending resources in gearing up to defend against a nonexistent threat.
Prior announcements by competitors can and do occur in a vari-ety of media: official press releases, speeches by management to se-curities analysts, interviews with the press, and other forms. The medium chosen for the announcement is one clue to its underlying motives. The more formal the announcement, the more the an-nouncing firm wants to be sure that the message will be heard, and the broader the audience it probably seeks to reach. The medium for the announcement also affects who will see it. An announcement in a specialized trade journal is likely to be noticed only by competitors or other industry participants. This may carry a different connota-tion from an announcement made to a broad audience of security analysis or to the national business press. A prior announcement to a broad audience may be a way of establishing a “public” commit-ment to do something that is perceived by competitors as being hard to back down from, with the consequent deterrent value.7
2. ANNOUNCEMENTS OF RESULTS OR ACTIONS AFTER THE FACT
Firms often announce (verify) plant additions, sales figures, and other results or actions after they have occurred. Such announce-ments may carry signals, particularly to the degree that they disclose data that are hard to get otherwise and/or are surprising for the an-nouncing firm to make public. The after-the-fact announcement has the function of insuring that other firms know and take note of the data disclosed—which can influence their behavior.
Like any announcement, an ex post announcement can be wrong or more likely misleading, although this does not seem to be com-mon. Many such announcements refer to data like market shares that are not audited nor are subject to full SEC screening procedures and liability. Firms sometimes announce misleading data if they be-lieve such data can be preemptive or can communicate commitment. An example of this tactic is announcing sales figures that include the sales of some related products outside the narrow product category in the total, that is, inflating apparent market share. Another tactic is to quote final capacity for a new plant, even though reaching that capacity will take a second addition, while representing the final ca-pacity implicitly as initial capacity.8 If the firm can learn about or deduce such misleading practices, they will carry important signals about the competitor’s objectives and true competitive strengths.
3. PUBLIC DISCUSSIONS OF THE INDUSTRY BY COMPETITORS
It is not uncommon for competitors to comment on industry conditions, including forecasts of demand and prices, forecasts of future capacity, the significance of external changes such as material cost increases, and so on. Such commentary is laden with signals be-cause it may expose the commenting firm‘s assumptions about the industry on which it is presumably building its own strategy. As such, this discussion can be a conscious or unconscious attempt to get other firms to operate under the same assumptions and thereby minimize the chances of mistaken motives and warfare. Such com-mentary can also contain implicit pleas for price discipline: “Price competition is still very harsh. The industry is doing a lousy job of passing along increased costs to the consumer.”9 “The problem in this industry is that some firms do not recognize that these current prices will be detrimental to our ability to grow and produce a qual-ity product in the long run.”10 Or discussions of the industry may contain implicit pleas that other firms add capacity in an orderly fashion, not engage in excessive advertising competition, not break ranks in dealing with large customers, or any number of other things, as well as implicit promises to cooperate if others act “prop-erly.”
Of course, the firm making the comments may be seeking to in-terpret industry conditions in such a way as to improve its own posi-tion. It may prefer that prices fall, for example, and may therefore describe industry conditions so that its competitors’ prices appear too high, even though competitors might truly be better off holding their price levels. This possibility implies that firms reading the sig-nais in their competitor’s commentary must verify industry condi-tions themselves and search for areas in which a competitor’s posi-tion might be improved by its interpretation of the facts, thereby compromising its intentions.
In addition to commentary on the industry generally, competi-tors sometimes comment on their rival‘s moves directly: “The recent extension of credit to dealers was inappropriate for X and Y rea-sons.” Such commentary can signal an indication of pleasure or dis-pleasure with a move, but like any other public announcement, there are alternative interpretations of its purposes. It may be self-serving by slanting the interpretation of the desirability of the competitor’s move so that its own position is improved.
Sometimes firms praise competitors by name or the industry generally. This has occurred, for example, in hospital management. Such praise is usually a conciliatory gesture aimed at reducing ten-sions or ending undesirable practices. It is most common in indus-tries in which all firms are affected by the industry’s collective image with the customer group or financial community.
4. COMPETITORS’ DISCUSSIONS AND EXPLANATIONS OF THEIR OWN MOVES
Competitors often discuss their own moves in public or in fo-rums where the discussion is likely to reach other firms. A common example of the latter is to discuss a move with major customers or distributors, in which case the discussion will almost surely be circu-lated around the industry.
A firm’s explanation or discussion of its own move can serve, consciously or unconsciously, at least three purposes. First, it may be an attempt to get other firms to see the logic of a move and hence follow it or to communicate that the move is not to be taken as a provocation. Second, explanations or discussions of moves can be preemptive gestures. Firms introducing a new product or entering a new market sometimes fill the press with stories about how costly and difficult the move was to make. This may deter other firms from trying. Finally, such discussions of moves may be an attempt to communicate commitment. The competitor can stress the large amount of resources expended and its long-run commitment to a new area to try to convince rivals that it is there to stay and to not at-tempt to displace it.
5. COMPETITORS’ TACTICS RELATIVE TO WHAT THEY COULD HAVE DONE
Relative to what a competitor could have feasibly chosen to do, the prices and advertising levels actually chosen, the size of capacity additions, specific product characteristics adopted, and so on, all carry important signals about motives. To the degree that its choices of strategic variables was the worst it could have taken with respect to damaging other firms, this is a strong aggressive signal. If it could have hurt competitors more with strategies other than the one chosen, which were within its set of feasible alternatives (e.g., a price higher than the competitor‘s cost might justify), this potentially sig-nals conciliation. A competitor behaving in a way inconsistent with its narrowly defined self-interest may implicitly be signaling concili-ation as well.
6. MANNER IN WHICH STRATEGIC CHANGES ARE INITIALLY IMPLEMENTED
A competitor‘s new product can be initially introduced in a pe-ripheral market, or it can immediately be aggressively sold to the key customers of its rivals. A price change may be made initially on products that represent the heart of a competitor‘s product line, or the price changes can be first put into effect in product or market segments where the competitor does not have a great interest. A move can be made at the normal time of the year for adjustments of its type, or it can be made at an unusual time. These are just exam-ples of how the manner in which almost any strategic change is im-plemented can help differentiate between a competitor‘s desire to in-flict a penalty and its desire to make a move in the best interests of the industry as a whole. As usual where such motives are involved, however, there is the risk of bluffs.
7. DIVERGENCE FROM PAST GOALS
If a competitor has historically produced products exclusively at the high end of the product spectrum, its introduction of a signifi-cantly inferior product is an indication of a potential major realign-ment in goals or assumptions. Such a divergence from past goals in any other area of strategy carries a similar message. These diver-gences should probably lead to a period of intense attention to sig-naling and competitor analysis.
8. DIVERGENCE FROM INDUSTRY PRECEDENT
A move that diverges from industry norms is usually an aggres-sive signal. Examples include discounting products that have never been discounted in the industry and plant construction in an entirely new geographic area or new country.
9. THE CROSS-PARRY
When one firm initiates a move in one area and a competitor re-sponds in a different area with one that affects the initiating firm, the situation can be called a cross-parry. This situation occurs not in-frequently when firms compete in different geographic areas or have multiple product lines that do not completely overlap. For example, an East-Coast-based firm entering the western market may see a western firm in turn entering the eastern market. A situation not far from this occurred in the roasted coffee industry. Maxwell House has long been strong in the East, whereas Folger’s strength is in the West. Folger’s, acquired by Procter and Gamble, moved to increase its penetration in the eastern markets through some aggressive mar-keting. Maxwell countered, in part, by cutting prices and raising marketing expenditures in some of Folger’s key western markets. Another example may be occurring in the machinery sector. Deere entered the earthmoving industry in the late 1950s with a strategy similar to Caterpillar’s. Deere has recently pushed even harder to penetrate some of Caterpillar’s key markets. Rumors are now ram-pant that Caterpillar is planning to enter the farm equipment indus-try, where Deere is strong. ‘ ‘
The cross-parry response represents a choice by the defending firm not to counter the initial move directly but to counter it indi-rectly. By responding indirectly, the defending firm may well be try-ing not to trigger a set of destructive moves and countermoves in the encroached-upon market but yet clearly to signal displeasure and raise the threat of serious retaliation later.
If the cross-parry is directed toward one of the original initia-tor’s “bread and butter” markets, it may be interpreted as a serious warning. If it is directed toward a minor market, it may signal a warning of things to come but also the hope of not triggering any unsettling or hasty counterresponse by the original initiator. A re-sponse in a minor market may also signal that the defender will raise the ante with a more threatening cross-parry later if the initiator does not back off.
The cross-parry can be a particularly effective way to discipline a competitor if there is a great divergence of market shares. For ex-ample, if the cross-parry involves a price cut, the cost of meeting this price cut for the firm with the bigger share may be a lot greater than for the firm sending the signal. This fact can increase the pressure placed on the original instigator to back off.
An implication of all this analysis is that maintaining a small position in such cross-markets can be a useful potential deterrent.
10. THE FIGHTING BRAND
A form of signal related to the cross-parry is the fighting brand. A firm threatened or potentially threatened by another can introduce a brand that has the effect—whether this is the only motivation for the brand or not—of punishing or threatening to punish the source of the threat. For example, Coca-Cola introduced a new brand called Mr. Pibb in the mid-1970s which tasted very much like Dr. Pepper, a brand that was gaining market share. Maxwell House in-troduced a coffee brand called Horizon, which had similar charac-teristics and package design to Folger’s, in some markets where Fol– ger’s was seeking to gain position. Fighting brands can be meant as warnings or deterrents or as shock troops to absorb the brunt of a competitive attack. They are also often introduced with little push or support before any serious attack occurs, thereby serving as a warn-ing. Fighting brands can also be used as offensive weapons as part of a larger campaign.
11. PRIVATE ANTITRUST SUITS
If a firm files a private antitrust suit challenging a competitor, it can be taken as a signal of displeasure or in some cases as harass-ment or a delaying tactic. Private suits can thus be viewed a lot like cross-parries. Since a private suit can be dropped at any time by the initiating firm, it is potentially a mild signal of displeasure relative to, for example, a competitive price cut. The suit may be saying, “You have pushed too far this time and had better back off,” with-out taking the risks that would accompany a direct confrontation in the marketplace. For the weaker firm suing the stronger firm, the suit may be a way of sensitizing the stronger firm so that it will not undertake any aggressive actions while the suit is outstanding. If the stronger firms feels itself under legal scrutiny, its power may be ef-fectively neutralized.
For large firms suing smaller firms, private antitrust suits can be thinly veiled devices to inflict penalties. Suits force the weaker firm to bear extremely high legal costs over a long period of time and also divert its attention from competing in the market. Or, following the argument above, a suit can be a low-risk way of telling the weaker firm that it is attempting to bite off too much of the market. The oustanding suit can be left effectively dormant through legal maneuvering and selectively activated (inflicting costs on the weaker firm) if the weaker firm shows signs of misreading the signal.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.