At a critical moment during the 2011 movie Margin Call, the CEO of a fictional Wall Street investment bank addresses his board on the eve of the 2008 financial crisis: “There are three ways to make a living in this business: be first, be smarter, or cheat.” This could very well describe any business, but it rings true for those markets where technology and speed to insight play a critical role in delivering bottom line value. The CEO continued: “Now, I don’t cheat. And although I like to think we have some pretty smart people in this building, it sure is a hell of a lot easier to just be first.”

The legal market has been toying with artificial intelligence (AI) for several years now. Some firms have made greater use of it than others. Yet despite this progress, there is a very real feeling that we have yet to scratch the surface of AI’s true potential for shaping not only the operational process of practice groups like eDiscovery, but in creating entirely new avenues of revenue across the firm. And although a lot of law firms have some pretty smart people in their buildings, it sure is a hell of a lot easier to just be first.

This brings our attention toward understanding market signals. The challenges presented by data will continue to be solved by progressively more intelligent applications of AI tools. To maintain a competitive position, therefore, firms must have an eye toward anticipating competitor moves and ensure they are ready to engage appropriately.

Market Signals – An Introduction

A market signal is any action by a competitor that provides a direct or indirect indication of its intentions, motives, goals, or internal situation. The behavior of competitors provides signals in a myriad of ways. Some signals are bluffs, some are warnings, and some are earnest commitments to a course of action. Market signals are indirect means of communicating in the marketplace, and most if not all of a competitor’s behavior can carry information that can aid in competitor analysis and strategy formulation.

A prerequisite to interpreting signals accurately is to develop a baseline competitor analysis: an understanding of competitors’ future goals, assumptions about the market and themselves, current strategies, and capabilities. Reading market signals, a second-order form of competitor analysis, rests on subtle judgments about competitors based on comparison of known aspects of their situations with their behavior.

Market signals can have two fundamentally different functions: they can be truthful indications of a competitor’s motives, intentions, 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 particular competitor behavior involved and the medium employed. In discussing 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
   A prior announcement is a formal communication made by a competitor that it either will or will not take some action, such as opening a new office, employing a new solution, and so on. In general, prior announcements can serve a number of signaling functions that are not mutually exclusive. These may include preempting other competitors, threats of actions, tests of ompetitor sentiment, communicating pleasure or displeasure with competitive developments within the industry, minimizing the provocation of a forthcoming strategic adjustment, avoiding costly simultaneous moves, and communicating with the financial community. It should be clear from the above that an entire competitive battle can be waged through announcements before a single dollar of resources is expended.
2. Announcements of results or actions after the fact
   Such announcements may carry signals, particular to the degree that they disclose data that are hard to get otherwise and/or are surprising for the announcing firm to make public. Firms sometimes announce misleading data if they believe such data can be preemptive or can communicate commitment.
3. Public discussions of the industry by competitors
   Such commentary is laden with signals because it may expose the commenting firm’s assumptions about the industry on which it is presumably building its own strategy. Of course, the firm making the comments may be seeking to interpret industry conditions in such a way as to improve its own position.
4. Competitors’ discussions and explanations of their own moves
   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. Second, explanation or discussions of moves can be preemptive gestures. Third, such discussions of moves may be an attempt to communicate commitment.
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.
6. Manner in which strategic changes are initially implemented
   A competitor’s new product can be initially introduced in a peripheral market, or it can immediately be aggressively sold to the key customers of its rivals. The manner in which almost any strategic change is implemented can help differentiate between a competitor’s desire to inflict 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
   Divergences should probably lead to a period of intense attention to signaling and competitor analysis.
8. Divergence from industry precedent
   A move that diverges from industry norms is usually an aggressive signal.
9. The cross-parry
   This situation occurs not infrequently when firms compete in different geographic areas or have multiple product lines that do not completely overlap. The cross-parry response represents a choice by the defending firm not to counter the initial move directly but to counter it indirectly. The cross-parry can be a particularly effective way to discipline a competitor if there is a great divergence of market shares.
10. 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. Fighting brands can be meant as warnings or deterrents or as shock troops to absorb the brunt of a competitive attack.
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 harassment or a delaying tactic Private suit 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. For a 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.

Digitization is going to bring with it some thorny challenges. This in itself should not be too surprising or alarming; even the most beneficial developments have unpleasant consequences that must be managed. The Industrial Revolution was accompanied by soot-filled London skies and horrific exploitation of child labor. What will be their modern equivalents? Rapid and accelerating digitization is likely to bring economic rather than environmental disruption, stemming from the fact that as computers get more powerful, companies have less need for some kinds of workers.

Technological progress is going to leave behind some people, perhaps even a lot of people, as it races ahead. There has never been a better time to be a worker with special skills or the right education, because these people can use technology to create and capture value. However, there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.

Strategy formulation inherently contains some explicit or implicit assumptions about competitors and their motives. Market signals can add greatly to the firm’s stock of knowledge about competitors, and therefore improve the quality of these assumptions. Ignoring them is like ignoring competitors altogether.