Management And Accounting Web

Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press.

Chapter 5: Competitive Moves

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Porter's Competitive Strategy Main Page

Chapter 5: Competitive Moves p. 88

Most industries are structured as an oligopoly where competitive moves by one firm affect other firms in the industry. The dilemma for firms in an oligopoly is analogous to the Prisoners' Dilemma in game theory. Two prisoners are in jail in solitary confinement with no way of knowing what the other prisoner is saying. The police do not have enough evidence to arrest and convict them unless at least one of them talks. Each prisoner has to make a choice between maintaining silence, or testifying that the other prisoner committed the crime. If both prisoners remain silent, they both go free. If only one talks, he goes free and the betrayed prisoner is convicted. This purpose of this chapter is to present some principles related to competitive moves in this type of setting.

Industry Instability: The Likelihood of Competitive Warfare p. 89

Before a firm makes a competitive move it is important to understand the structure of the industry and the intensity of rivalry among existing competitors. Recall from Chapter 1 that the intensity of competitive rivalry has to do with whether there are numerous or equally balanced competitors, slow industry growth, high fixed or storage costs in the industry, a lack of differentiation or switching costs, situations where capacity must be added in large increments, diverse competitors with differing strategic choices, where strategy for some firms is based on achieving global prestige or technical credibility, and where there are high exit barriers caused by the requirement for specialized assets, high fixed costs to exit, strategic interrelationships, emotional barriers and government or social restrictions. All these components of industry structure influence each competitors' position and the degree to which their interests are likely to conflict. A competitor analysis (described in Chapter 3) is needed to examine each competitor's ability to defend itself against moves made by its rivals. Since these concepts have been discussed in previous chapters, the focus in this chapter is on the flow of information between firms in the industry.

Competitive Moves p. 91

An effective competitive move is one with a quick outcome that is favorable to the firm's interest and doesn't destabilize the industry or create a competitive war. One approach is to use brute force with superior resources and capabilities. But this may create a war of attrition that is costly for everyone in the industry. A second approach is to use finesse that avoids retaliation by other firms. The typical competitive move in an oligopoly usually involves both approaches.

Cooperative or Non-threating Moves p. 92

Three categories of non-threating moves:

1. moves that improve the firm's position as well as competitors' positions (e.g., stop doing something that wasn't a good idea in the first place, like inappropriate advertising),

2. moves that improve the firm's position as well as competitors' positions only if a significant number of competitors match the move (e.g., reducing its warranty from two years to one year), and

3. moves that improve the firm's position because competitors will not match the move (e.g., competing in a foreign market that other firms view as insignificant).

Moves may be viewed by competitors as non-threating if they do not even notice the move (e.g., an internal change), are not threatened because of assumptions about the industry, or if the move has little effect on the competitors' perceived performance. An example is where Timex introduced inexpensive watches that were not perceived as a threat to Swiss watch makers who sold high-priced watches through jewelry stores. Some ways to avoid misinterpretation of such a move are: use market signaling (announce in advance), reliance on a traditional industry leader, and to associate a move such as a price change to a visible index (e.g., price index).

Threatening Moves p. 95

The key involved in threatening moves is to predict and influence retaliation. Questions to be considered are: How likely is retaliation?, how soon with it occur?, how effective will it be?, how strong will it be?, and can it be influenced?

Lags in Retaliation

A lag before competitors retaliate is preferable and may occur when competitors do not perceive the initial strategic move, it takes considerable time to retaliate (e.g., requires a product change or new capacity), the competitor's inability to pinpoint retaliation (e.g., how a large firm should retaliate when a small competitor reduces its price), and when a competitor has conflicting goals or mixed motives (e.g., retaliating in one area of the business hurts it in another area).

Defensive Moves p. 98

Defensive moves either create a situation where the competitor initiating the move decides to back down, or where the move is prevented by making it clear that there will be retaliation.

Discipline as a Form of Defense

A fighting brand (discussed in Chapter 4) is mentioned as a way to aim the retaliation at a specific firm. A generalized response (rather than one focused on the firm initiating the battle), is more likely to result in a chain reaction.

Denying a Base

Techniques for denying a base for the competitor to meet their goals (e.g., a new entrant) include strong price competition, research, or advertising etc., and using special deals to load customers up with inventory.

Commitment p. 100

Commitment refers to how a firm communicates its intentions related to competitive moves. For example, communicating a strong commitment to retaliate if a competitor moves in a certain way reduces the uncertainty on the part of the competitor in how the firm will react. Three types of commitment include: A commitment that the firm is unequivocally making a move (to deter retaliation), a commitment that the firm will retaliate if the competitor makes certain moves (to deter threatening moves), and a commitment that the firm will take no action (to create trust).

Communicating Commitment

Communicating a credible commitment requires the resources and other mechanisms needed to act on the commitment in a timely fashion (e.g., visible assets such as excess cash or production capacity, fighting brands, etc.), a clear intention to act on the commitment (e.g., history of retaliation, actions that reduce the lag in retaliating), either the inability to back down or the resolve not to do so (e.g., a publicized long-term contract with a customer), and the ability to detect compliance when a competitor acts in a way that triggers the commitment (e.g., known systems of monitoring sales, and talking to customers and distributors).

Trust as a Commitment

Since competitors tend to be wary of a competitor's conciliatory gestures, a persuasive way to communicate trustworthiness is needed. One way to gain trust is to act in a way that provides a benefit to competitors (e.g., yield part of the market to other firms).

Focal Points p. 105

Discovering a focal point refers to finding a resting place where the expectations of the various competitors in an industry converge, i.e., reach a stable outcome such as agreeing on percentage markup pricing rules. Firms should attempt to identify a desirable outcome as early as possible, simplify industry decision variables (e.g., pricing), and try to set the focal point in their best interest (e.g., structure their moves to make a certain outcome appear to emerge naturally).

A Note on Information and Secrecy p. 106

Releasing information about the firm should be selective, i.e., only made as an integral part of the firm's competitive strategy.

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Go to the next Chapter. Porter. 1980. Competitive Strategy. Chapter 6: Strategy Toward Buyers and Suppliers. (Summary), or back to Porter's Competitive Strategy Summaries Main Page.

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