Defensive tactics of the firm

Defensive   strategy    aims    to    influence   a   challenger’s   calculation of the expected return  from entry or repositioning, causing the chal­ lenger to conclude that the move is unattractive or to opt for a strategy that is less threatening. To do this, a defender  invests in defensive tactics. Most defensive tactics are costly and reduce short-term  profita­ bility in order to raise the longer-term sustainability of a firm’s position. However, most firms cannot eliminate the threat of attack completely, except at prohibitive costs. Hence  a defender  should  invest to reduce the threat of attack to an acceptable level, balancing the risk of attack against the cost of defense.

Three  types of defensive tactics   underlie  any defensive strategy:

  • raising structural barriers
  • increasing  expected   retaliation
  • lowering the inducement for attack

Structural barriers to entry/m obility  are sources of disadvantage for a challenger relative to the firm (see Chapter 1). The presence of structural  barriers  worsens the challenger’s expected profit   from   a move. For example, General  Foods’ Maxwell  House  Coffee brand enjoys scale economies in marketing  that  will force a challenger  to bear higher than  proportional  marketing  costs relative to General Foods until it reaches proximity in m arket share. These higher costs will reduce the   challenger’s projected  profit   from   entry   below   that of General Foods,  and therefore reduce  the likelihood of a challenge. The   second   type   of   defensive   tactic   is   those   that   increase   the threat  of retaliation perceived by challengers. Expected   retaliation   by the firm will lower a challenger’s revenues or raise its costs, and thus erode the challenger’s expected profitability. Raising  structural  barriers and increasing expected retaliation both seek to worsen a challenger’s position vis-a-vis cost drivers or drivers of uniqueness, thereby eroding its relative position.

A third type of defensive tactic involves lowering the inducement for challengers to attack.  While raising barriers and expected retaliation is aimed at reducing a challenger’s expected profit, lowering the induce­ ment requires that  a firm accept lower profits. If a firm reduces prices or takes profits in an interrelated business unit instead of in the indus­ try, for example, a challenger will see less to gain if an attack is successful.

All three types of tactics can be employed both  before a challenge has occurred and once it has begun. Once  a challenge has begun, however, a firm must consider not  only its position toward  the chal­ lenger but also how its behavior toward the challenger might discour­ age or encourage others. Investments in defensive tactics cannot and should not be measured against conventional short-term profitability targets. This ignores their purpose. Actions that deter challengers delib­ erately reduce short-term profitability to ensure long-term profitability.

1. Raising Structural  Barriers

Chapter 1 summarized the types of structural barriers to entry/ mobility that  may be present  in   an   industry.  Every   type of barrier can be influenced by a defender. In some industries, the levels of spending on advertising, sales force, plant capacity, and other activities that is necessary for doing business (ignoring defensive considerations) creates high barriers as a by-product.  If the barriers  naturally  created by ongoing activities are   very   high,   a   firm   is in   the   happy  position of not having to make further defensive investments in barriers. How­ ever, in the long run it may be profitable to invest in building barriers even higher than natural barriers.

While offensive moves to enhance  competitive advantage  in the value chain can raise structural barriers, I concentrate here on defensive moves to raise barriers. Defensive tactics that raise structural barriers are actions that  block logical avenues of attack  for challengers.   Some of the  most im portant are the following:

Fill Product   or Positioning   Gaps.       Barriers  are   increased   when a firm fills gaps in its product line or preempts alternative marketing themes that  a   challenger  might  logically   employ.   Such   moves   force a challenger to take   the defender  head-on  instead   of being   able to gain an unopposed beachhead,  or command premium  prices that can be used to offset higher costs. Filling gaps can take a number of forms:

  • Broadening the product line to close off possible product Seiko acquired the Pulsar watch brand to block attacks at the low end by Citizen and Timex.
  • Introducing brands that m atch the product characteristics or brand positionings the challenger has or could These block­ ing or fighting brands raise barriers without undermining the position of the principal brand.
  • Foreclosing alternative marketing themes by using such themes on secondary product lines or in secondary marketing  cam­- paigns
  • Defensive low pricing of product varieties adjacent to competi­ tors’ lines in order to discourage competitor line extensions (Chapter 7).
  • Encouraging good competitors (Chapter 6) that fill gaps without threatening the firm.

Defensive product  varieties   and   marketing  activities   should   not be expected to be as profitable as a firm’s core business,   and   prices must reflect their  defensive value.5 However,  the defensive value of such products or marketing  activities does not necessarily require that a firm spend heavily on them. Even if gap-filling products  are not pushed aggressively, their   mere   presence   acts   as   a deterrent  because of the threat that  they will be activated  if a challenger  threatens. Raising barriers may thus at the same time lead a challenger to expect greater retaliation.

Block  Channel Access.      When a firm makes  it more difficult for a challenger to gain access to distribution channels it raises a major structural barrier. Defensive strategy should  be directed  not  only to­ ward a firm’s own channels but also toward blocking access to other channels that may be a substitute channel or a springboard for the challenger’s entry  in the firm’s channels.  For  example,   challengers often gain incremental volume and experience by using private label channels.

Channel-blocking  tactics include   the following:

  • Exclusive agreements with
  • Filling product line gaps in order to offer the channel  a full Competitors then have a harder time getting established.
  • Expanding the product line to include all possible sizes and forms of a product, in order to clog the channels’ shelf or warehouse space.
  • Bundling or unbundling as appropriate  to reduce  vulnerability to challengers (Chapter 12).
  • Aggressive volume discounts or discounts based on the channels total purchases to discourage experimentation with new suppli­- ers.
  • Attractive after-sales service support of a firm’s products that prompts channels to forgo their own investment in after-sales support personnel and facilities.
  • Willingness to supply private label sellers in order to preempt a challenger’s access to volume.
  • Encouraging good competitors,  who fill up channels  without threatening the firm.

Raise Buyer Switching Costs.     The firm can raise barriers by rais­ ing the switching cost of buyers. I have described the ways to increase switching costs in Chapters 4 and 8. Some common approaches  in defensive strategy include:

  • Free or low-cost training of buyer personnel in the use or main­ tenance of a firm’s product, or in specialized   procedures  such as record  keeping that  are only compatible  with purchasing from the Johns Manville has employed buyer training effectively to   raise   the   switching   costs   of roofing   contractors in buying roofing products.
  • Participating in joint product development with buyers, or pro­ viding applications engineering assistance to them to help inte­ grate a firm’s product into the buyer’s product or process.
  • Establishing ties to the buyer through the use of dedicated computer terminals to allow direct ordering or inquiries, or through maintaining buyer data bases on the firm’s process.
  • Ownership of on-premise  storage   facilities or equipment  that is used at the buyer’s location. In m otor oil, for example, leading suppliers own tanks for bulk storage  located on the garage or repair shop’s process.

Raise the Cost o f Gaining Trial.     If a challenger faces high costs of getting buyers to try its product,  it faces a considerable barrier. Raising this barrier requires that  a firm understand  those product varieties that  are purchased  first, as well as the   types of buyers that are most likely to be early experimenters and purchasers of a challeng­ er’s product. Steps to close off these avenues of trial for competitors include:

  • Selective price reduction  on   items   in the   line most  likely to be purchased first.
  • High levels of couponing  or sampling  of buyers  most  prone to experiment.
  • Discounting or deals that increase the inventory held by the buyer, lengthen the time between orders,  or lengthen the period of All these impede a challenger’s access to orders.
  • Announcing or leaking information about impending new prod­ ucts or price changes that cause buyers to postpone purchases.

Defensively Increase Scale Economies.      Barriers increase if econo­ mies of scale   grow.   It   is often   possible   to   increase   scale   economies in areas such as advertising and technology development, where scale thresholds are competitively determined.  By boosting   its spending   rate on technology development and hence increasing the rate of new prod­ uct development, for example, a firm can increase the challenger’s required technology  development investment,  which is amortized  over a smaller base of sales. A firm can increase scale economies most effectively in value activities where minimum scale is determined by competitive spending levels rather than determined by technology (see Chapter  3). Often   this   implies differentiating   in ways where the firm has a cost  advantage in differentiation (Chapter 4).

Scale thresholds are often increased defensively in a number  of ways:

  • Increased advertising spending.
  • Increased spending to boost the rate of technological  change.
  • Shorter model life cycles, where models require fixed or quasi­ fixed development costs.
  • Increased sales force or service coverage.

Defensively Increase   Capital Requirements.    If a firm can   raise the amount  of capital needed to   compete  with   it,   a challenger  may be discouraged. While many defensive tactics in effect raise a challeng­ er’s capital requirements by increasing start-up costs, a number  of defensive moves have a particular impact on capital requirements:

  • Raising the amount of financing provided to dealers or buyers.
  • Increasing warranty coverage or liberalizing policy toward re­- turns
  • Reducing delivery time for products  or spare   parts,   implying an increase in the amount  of inventory  required  or the need for excess manufacturing capacity.

Foreclose Alternative Technologies. If a firm can foreclose alter­ native technologies a challenger  might  employ,   it blocks   this   avenue of attack. Some tactics for foreclosing technologies are:

  • Patenting the feasible alternative  technologies   in   the   product or process, as Xerox did effectively in the early phases of the copier industry.
  • Maintaining a participation in alternative technologies, through purchasing licenses, maintaining pilot plants employing alterna­ tive technologies, forming coalitions with other firms with ex­ pertise in alternative  technologies, or actually   producing products using an alternate All these tactics let a challenger know that the firm has access to the alternative technologies if it needs them.
  • Licensing or encouraging good competitors to employ alterna­ tive technologies (see Chapter 6).
  • Discrediting alternative  technologies through  signaling.

Invest in Protecting Proprietary Know-how.       If a firm can protect its proprietary  know-how  in products,  processes,   or   other  activities in the value chain, it raises barriers. Firm s often have no systematic program in place to limit the diffusion of their know-how. Building on the discussion in Chapter 5, some elements of such a program include:

  • Strictly  limiting access to facilities and  personnel.
  • Fabricating or modifying production  equipment  in-house.
  • Vertical integration into key components to avoid passing know­ how to Michelin practices this aggressively in tires.
  • Human resource policies to minimize personnel turnover and prevent disclosures.
  • Aggressive patenting of inventions.
  • Litigation against all Litigation may delay invest­ ments by challengers until   the   uncertainties  are   resolved, even if the possibility of success in the litigation is low.

Tie   Up Suppliers.     Barriers increase if a firm can   foreclose or limit a challenger’s access to   the best sources   of raw   materials,   labor, or other inputs. Some representative tactics are as follows:

  • Exclusive contracts with the best suppliers.
  • Backward integration or partial or complete ownership of sup­ pliers to foreclose sources of supply.
  • Purchasing key locations (mines,   forest   lands,   )   in   excess of needs to preempt them from competitors.
  • Encouraging suppliers to customize  their   value chains   to meet a firm’s needs, raising supplier switching costs to serving new competitors.
  • Signing long-term purchasing contracts to tie up supplier capac­ Coca-Cola reportedly pursued this strategy in sourcing high-fructose corn syrup, a low cost substitute for sugar.

Raise Competitors’ Input Costs. If a firm can raise a challenger’s relative input  costs, it raises   barriers.   Most  opportunities  to   do   so rest on differences in competitors’ (or potential competitors’) cost struc­ tures, so that  a given input  price change  has a greater  impact  on them than on the firm. Some common tactics are as follows:

  • Avoiding suppliers that also serve competitors or potential com­ petitors, raising these suppliers’ costs and avoiding   the   transfer of some of the firm’s scale economies to competitors  through the suppliers.
  • Bidding up the price of labor or raw materials if they represent a higher percentage  of costs for competitors.  This tactic may well have been used by large beer companies  against  smaller firms with less automated plants.

Defensively Pursue Interrelationships.       A   firm   can   often   reduce its costs or enhance  differentiation by   harnessing  interrelationships that competitors cannot match  (Chapter 9). At the same time, pursuit of interrelationships by competitors that a firm cannot  match  are threats that must be defended against. Defensive considerations  may suggest that a firm pursue particular interrelationships, including enter­ ing some new businesses, to enhance its defensive posture.

Encourage Government  Policies That  Raise Barriers. Govern­ ment policies can become m ajor structural barriers in areas such as product or plant safety, product testing and pollution control. Policies such as these can   increase economies   of scale,   capital   requirements, and other potential barriers. A firm can often shape the character of government policies in ways that are favorable to defending its position. It can:

  • Encourage stringent safety and pollution standards.
  • Challenge competitors’ products or practices in regulatory pro­-ceedings
  • Support requirements  for extensive product testing.
  • Lobby for trade financing or other favorable trade  policies to deal with foreign competitors.

Form Coalitions To Raise Barriers or Coopt Challengers. Coali­ tions with other firms can raise barriers in many of the ways described above, such as foreclosing alternative  technologies or filling product gaps. At  the same time,   coalitions   with   likely challengers   may be a way to convert a threat into an opportunity.

2. Increasing Expected  Retaliation

A second type of defensive tactic is an action that  increases the threat of retaliation perceived by challengers. The  threat  of retaliation hinges on both the perceived probability of retaliation and its expected severity. A range of tactics are available to a defender  to signal its intentions to retaliate against potential challengers. For example, Dow Chemical has built capacity in advance of demand in magnesium  for many years, indicating  its commitment  to defending its share. Had Dow been continually constrained for capacity, challengers might have been more tempted to enter.

Expected retaliation can be increased by tactics that  indicate that a firm intends to vigorously defend its position, that create conditions making  it inevitable that  the firm must  retaliate,   or that  indicate   it has the resources to do so. The  threat  of  retaliation perceived by potential challengers is continually  being influenced by a firm’s behav­ ior. A firm’s reputation for retaliation  is strongly  influenced by its history, particularly its response to past challengers. The  firm must carefully manage the image it projects to actual and potential competi­ tors. Some of the most im portant ways of increasing a firm’s perceived threat of retaliation include:

Signal Commitment To Defend.   A firm increases expected retali­ ation if it consistently signals its intention to defend its position:

  • Announced intentions by management to defend market share in the industry.
  • Corporate pronouncements of the importance of a business unit to the firm.
  • Announced intention to build adequate capacity ahead of de­- mand.

Such   signaling   can   and   should  be carried  out  consistently   via all the available channels, such as public statements, trade press, dis­ tributors, and buyers, in order  to have the greatest  defensive impact.

Signal Incipient Barriers.    M ost tactics that raise effective struc­ tural barriers require the firm to make  a significant investment. How­ ever, a firm may sometimes be able to achieve the same effect through market signaling or partial investment. M arket  signaling of planned moves or partial investment has the purpose of increasing expected retaliation by the firm in the future.  For  example, a firm might  an­ nounce or leak information about a new product generation, a fighting brand or new process technology, raising the risk perceived by a chal­ lenger that the actual move will be forthcoming. Such market signaling can cause challengers to postpone future commitments until more information can be gained to learn if the signals are credible. IBM frequently announces new product generations well in advance, for example.

Establish Blocking Positions. A firm can provide a lever for retal­ iation by maintaining  blocking or defensive positions in other countries or industries occupied by competitors or potential competitors  (see Chapter 9). Blocking positions in business units where  competitors generate a disproportionate share of their  cash flow or profitability become the basis for particularly effective retaliation.

Their value rests on the principle that price cutting  and  other retaliatory tactics   may   be less costly   in   industries  or countries  where a firm has a small position than  in a firm’s key industries. Blocking positions may also be a less risky form of retaliation than direct retalia­ tion, which has a greater propensity  to trigger escalation and to spill over to damage good competitors.

Match   Guarantees.      A   firm   raises the   expectation  of retaliation if it commits  itself to match  or better  prices or other  terms  offered by   competitors  (“ We will not  be undersold”).  A   public stance   that it will do so often deters challengers from attempting to gain position through  discounting, particularly  if a firm backs   its claim   once or twice in a publicized way. O f course the firm must  be capable of supporting such a claim in the eyes of challengers.

Raise the Penalty o f Exit or Lost Share.      Anything that increases the economic need for a firm to m aintain its market share (raises its shrinkage barriers) is often a convincing  way to demonstrate serious­ ness about retaliation:

  • Constructing capacity well ahead of demand.
  • Entering into long-term supply   contracts  for   fixed   quantities of inputs.
  • Increasing  vertical integration.
  • Investing in specialized facilities
  • Publicized contractual  relationships  that  raise   the   fixed cost of exit.
  • Interrelationships with other business units in the firm that demonstrate an overall corporate  commitment  to   succeeding in the industry.

Raising the   penalty   of lost share  or exit surely   introduces  the risk that  a firm will actually have to pay that penalty. However,  this and most other  effective defensive tactics   raise   cost or   risk   in   order to enhance the sustainability of position.

Accumulate Retaliatory Resources. The threat of retaliation is increased if a firm has the resources in place needed to retaliate effec­ tively. Some ways of demonstrating the capacity to retaliate include:

  • Maintaining excess cash reserves or liquidity (a “ war chest”).
  • Holding new models or product generations in reserve, though leaking their existence.

Encourage Good Competitors. Good  competitors  increase   the threat of retaliation in many industries  by serving as a first line of defense against challengers (see Chapter 6). The presence of the right competitors may also divert attacks in their direction.

Set Examples.    A   firm   affects its   image for retaliation   through its behavior toward competitors that may not be real threats as well as through its behavior in response to threatening challengers. Defen­ sive value is often reaped from using moves against nonthreatening challengers to demonstrate  how   tough  the firm is in responding  to real challengers. A very vigorous response to one challenger  sends a message to others.

Establish Defensive Coalitions. Coalitions with other firms may increase the threat of retaliation by affecting many  of the factors de­ scribed above. A   coalition, for example, may provide blocking positions or retaliatory resources a firm itself does not have.

Many of the ways to increase the perceived threat  of retaliation force the firm to increase its level of risk. Indeed, by raising the firm’s risk the tactics become  significant to   competitors.  Thus  a firm   must be prepared to invest if it wants to improve  the sustainability of its position in this way.


So far I have discussed the steps a firm can take to increase the perceived threat of retaliation and prevent an attack. The period imme­ diately after a move has begun is a particularly  delicate one for a challenger,   however,   during  which  it   is hungry  for   information  on its progress and is sensitive to early successes or setbacks. Challengers have a tendency to   read   a great  deal into early   results, often using them as a basis for longer-term projections. Hence, even if a defender’s retaliation is unsustainable for long, it may serve to shape a challenger’s expectations. As a general rule, quick and  vigorous retaliation is neces­ sary to limit an  attack.

A number  of additional  tactics become  possible once an attack has been mounted, because a firm then  knows  the identity of the challenger and something about its  strategy.

Disruption o f Test Markets  or Introductory  Markets. A   wide range of actions can disrupt market introductions and cloud the inter­ pretation of early results. Procter & Gamble is a tenacious rival in competitor test markets, for example. Such actions can raise a challeng­ er’s level of uncertainty about its position or cause it to adopt a more pessimistic view of future prospects. Typical disruptive tactics include:

  • High but erratic levels of advertising, couponing, or sampling.
  • Low-cost service, warranties, or trade-ins.

Leapfrogging. If a firm can introduce a new product or process during a challenger’s attack, this can be very discouraging to the chal­ lenger. This is particularly  true   if such   a   move forces the   challenger to make further investments to stay in the game just  after it has expended considerable resources.

Litigation. Litigation can raise the risks or costs of further  in­ vestment by a challenger, thereby delaying its progress. Forms of litiga­ tion that can be used in retaliation are as follows:

  • Patent suits that raise uncertainty about the future of a challeng­ er’s product or process.
  • A ntitrust suits that contest any aggressive tactics used by the challenger.
  • Suits that dispute product performance claims by challengers.

3. Lowering the Inducement for Attack

A third type of defensive tactic is actions that  lower the induce­ ment for attack instead of raise its cost. Broadly, profit serves as the inducement  for a challenger  to   attack  a   firm.   The  profits expected by a challenger if it succeeds are a function  of a firm’s own profit targets as well as the assumptions held by potential challengers about future market conditions.

Reducing Profit Targets. The profits earned by a firm are a highly visible indication of  the   attractiveness  of its   position.   An  essential part  of any defensive strategy, then,   is to decide what  current  price and profit levels are sustainable. M any firms have invited attack  by being too greedy. A firm can deliberately choose to   forgo   current profits to reduce the inducement for attack. This may imply lowering prices, raising discounts, and so on.

There must be a balance between structural entry/m obility barri­ ers and threat  of retaliation on the one hand,  and a firm’s profitability on the other.7 If a firm’s profitability is very high, challengers will attempt to cross even high barriers  or combat strong  retaliation. The high historical profitability in oil field services and pharmaceuticals industries, for example, attracted many firms to invest heavily in entry despite the presence of high entry barriers and entrenched competitors. For  example, TRW  has moved   into   oil   field   services   while   Procter & Gamble has entered pharmaceuticals. M any entrants  attracted  by high profitability fail to consider carefully the costs of entry, and often underestimate them. Similarly, high temporary profits in a cyclical industry are frequently misread as a long-term  opportunity.  The effect of being too greedy is thus to begin an implicit or explicit harvesting strategy as challengers erode the firm’s position.

Managing  Competitor Assumptions. A challenger’s assumptions about future industry prospects may lead it to attack  a firm. If challeng­ ers believe that an industry possesses explosive growth potential, for example, they may attack a firm despite high barriers. Managing com­ petitor assumptions  was discussed in general terms in Chapter 6. While a firm cannot credibly cause potential competitors to dismiss realistic assumptions about the industry, defensive strategy should attempt  to make potential challengers’ assumptions more realistic. Some options include:

  • Making realistic internal  growth  forecasts public
  • Discussing realistic interpretations of industry events in public forums
  • Sponsoring independent studies that will question unrealistic assumptions held by competitors.

Defensive strategy can be viewed in a broad sense as influencing competitor assumptions, including their assumptions about retaliation and the height of barriers. Influencing competitor  assumptions  about future industry conditions is an im portant part of the task.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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