Chapter 4: Market Signals
Study Guide by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Porter's Competitive Strategy Main Page
Chapter 4: Market Signals p. 75
Market signals are actions taken by competitors that indicate directly or indirectly its intentions, motives, goals, or internal situation. Signals include commitments to a course of action, bluffs, warnings, and other communications to the market. Interpreting market signals is a second-order form of competitor analysis.
Types of Market Signals
Two types of signals include truthful indicators of a competitor's intention, and bluffs that are intended to mislead other firms. Various types of important market signals include prior announcements of moves, announcements of results or actions after the fact, competitive discussions and explanations of their moves, competitive tactics relative to what they could have done, the manner in which strategic changes are initially implemented, actions divergence from past goals, actions divergence from industry precedent, cross-parries, fighting brands, and private antitrust suits.
Prior Announcements of Moves p.76
A prior announcement refers to a formal communication by a company that it will either take, or not take some action, e.g., build a new plant, change its prices, etc. Prior announcements can be used for various purposes including:
1. to preempt other competitors by discouraging them from doing the same, e.g., add capacity,
2. threats to other competitors who may have indicated a move detrimental to the firm, e.g., a price cut,
3. as a test of competitor sentiments, e.g., announce a new warranty program to test competitor reactions,
4. to communicate pleasure or displeasure with competitive changes in the industry,
5. to minimize the provocation of a forthcoming strategic move,
6. to avoid costly simultaneous strategic moves by competitors, e.g., capacity additions,
7. to boost the firm's stock price or reputation,
8. to gain internal support and cut off internal debate about a strategic move.
As noted above, announcements can be bluffs. To interpret a competitor's signals correctly, it is important to determine what benefits the competitor would obtain from the actions indicated, recognize the timing of the announcement relative to the action to be taken, and where the announcement if made. If an announced move would provide lasting benefits to the competitor, the action is more probable than otherwise. If the announcement is far in advance of the action, the move is more likely to be conciliatory. Announcements can be made in press releases, speeches, press interviews, specialized trade journals, and in other ways. The broader the audience, the less likely the announcement is a bluff.
Announcements of Results or Actions After the Fact p. 80
Announcements after an action has been taken can provide information that would be hard to obtain in some other way, but they can be intentionally misleading, e.g., sales that include related products to inflate the firm's market share.
Competitive Discussions and Explanations of Their Moves p. 82
A competitor's public comments related to industry conditions (e.g., product demand, prices, capacity) can provide signals about the firm's assumptions and strategy. The purpose of their comments can be attempts to motivate other firms to act in a certain way, e.g., avoid a price war, negative advertising, or adding capacity in an disorderly way.
Competitive Tactics Relative to What They Could Have Done p. 83
Actions that a firm takes that are the most damaging to competitors provide a strong aggressive signal. Much less damaging actions potentially signal conciliation.
Manner in Which Strategic Changes are Initially Implemented p. 83
A strategic move can be made to inflict a penalty on competitors, or a move that is in the best interest of the industry. For example, a new product that is aggressively sold to the key customers of its rivals, as opposed to the broad market for the industry.
Divergence from Past Goals p. 83
An example of a divergence from past goals is where a producer of high end products begins to produce products at the lower end of the product spectrum.
Divergence from Industry Precedent p. 84
An example of a divergence from industry precedent is where a firm offers discounts in an industry where discounts are uncommon.
The Cross-Parry p. 84
A cross-parry is a situation where a firm responds to a competitor's move in one area with an action in a different area that affects the initiating firm. The cross-parry is an indirect counter to the initial move, perhaps to signal displeasure, but not to trigger a competitive war. The more important the cross-parry area is to the initiating firm, the greater the warning.
The Fighting Brand p. 85
A fighting brand (a copy of a competitor's product) is a type of cross-parry where a firm introduces a new brand to counter a threat by a competitor. Porter provides an example where Coca-Cola introduced a brand called Mr. Pibb to counter the Dr. Pepper brand that was gaining market share.
Private Antitrust Suits p. 85
Private antitrust suits are similar to cross-parries. They can send a message to back off, and where a larger firm is suing a smaller firm, an intention to inflict a penalty (e.g., excessive legal fees).
The Use of History in Identifying Signals p. 86
Using a firms history in identifying signals refers to searching for signs a firm may give before making a completive move in the past that indicate how they will act in the future. For example, do price changes in an existing line always precede the introduction of a new product?
Can Attention to Market Signals be a Distraction p. 87
Some might argue that companies should concentrate on competing rather than second-guessing competitors comments and actions. However, market signals can add a great deal to firm's ability to develop an effective competitor analysis.
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Go to the next Chapter. Porter. 1980. Competitive Strategy. Chapter 5: Competitive Moves. (Summary), or back to Porter's Competitive Strategy Summaries Main Page.
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