Evaluating defensive tactics of the firm

The defensive tactics described above differ greatly in their characteristics and in their appropriateness for a firm. A firm must decide which tactics will be most effective in its industry in view of the potential challengers it faces. A number of important tests can be used to assess defensive tactics:

Value to Buyers. A firm should select those defensive tactics which are valuable to buyers (Chapter 4). Many defensive tactics involve investments in such things as advertising, fighting brands, and price reductions on certain product varieties. A tactic directed toward buyers will not be effective for defensive purposes unless the buyer values it. If increased advertising leads to no increase in buyer awareness or loyalty, for example, then higher advertising spending will have no defensive value because a challenger need not match it. If buyers are highly sensitive to credit, on the other hand, then offering more credit will force a challenger to provide comparable credit or face a disadvantage.

A defensive tactic that enhances differentiation at the same time as it increases the sustainability of the firm’s competitive position partly pays for itself. The buyer response to a defensive tactic need not pay for its entire cost, however, but only enough to place a challenger that fails to match the defensive tactic at a disadvantage. The defensive value of an advertising increase should not be measured only by whether the ads pay for themselves in increased sales, for example, but also whether they also force any challenger to spend at higher levels to attack the firm’s position.

Cost Asymmetry. A firm should choose defensive tactics that place potential challengers at the greatest relative cost disadvantage. The effectiveness of a defensive tactic is a function of the asymmetry between the cost of the tactic to the firm and the cost imposed on the challenger. For example, an increase in national network TV advertising by a large share firm usually imposes proportionally greater spending requirements on a challenger with smaller share, because national network TV advertising is subject to economies of scale driven by national market share. Introducing a new product generation may also raise a challenger’s cost proportionally more than the firm’s, since new-product development costs are largely fixed and the challenger must amortize them over a much smaller initial volume. Conversely, a price cut may cost a firm the same or even more than it costs a challenger. Any fool can cut the price, goes the old maxim, and a firm often hurts itself more than the challenger in defending in this way.

Cost asymmetry stems from differences in the firm’s and challenger’s position vis-à-vis cost drivers such as scale, learning, location, or interrelationships. The firm should select defensive tactics which elevate its cost position less than they elevate challengers’—frequently these are differentiating factors where the firm has a cost advantage in differentiating (Chapter 4). In some industries boosting advertising will put challengers at the greatest disadvantage, while in other industries it may be increasing the size of a sales force. The analysis of cost behavior described in Chapter 3 provides the starting point for identifying such asymmetries.

Cost asymmetry in a defensive tactic is strongly influenced by whether the tactic can be targeted at likely avenues of attack or threatening challengers, or whether it is more generalized. Tactics that must apply across the board (e.g., a cut in list price) are generally more expensive than those that can be targeted. For example, the ability to cut price only on products that are likely initial purchases by new buyers is clearly much less costly than a price reduction on the entire line. Good defensive strategy requires that defensive investment be targeted as much as possible towards the most serious threats.

The cost asymmetry of defensive tactics is also clearly a function of the specific challenger involved. For example, an increase in national advertising is one thing if challengers are start-up firms, but quite another thing if the challenger is a large and successful consumer goods firm. Cost asymmetry in defensive tactics, then, is relative and not absolute.

Sustainability of Effect. A firm should select defensive tactics that have a lasting effect. The cost effectiveness of any defensive tactic is a function of the need to reinvest to maintain its defensive value. An increase in advertising has some effect beyond the current period, for example, but a firm must continually reinvest in advertising in order to maintain the barrier. An investment in a new production process, however, may not decay as a barrier as rapidly. Similarly, investing in foreclosing access to suppliers may yield a long- lasting barrier requiring little reinvestment. If a firm is unable to create lasting barriers or a credible long-term threat of retaliation, then little or no defensive investment in them is justified. A firm should invest instead in lowering the inducement to enter or it should harvest its position.

Clarity of the Message. A firm should select defensive tactics it is confident that potential challengers will detect as well as understand their implications. Competitors often differ in their understanding of industry economics and in their ability to perceive signals. Signals can be missed and the significance of some tactics misunderstood. Generally, tactics involving price, credit, advertising, sales force, and new products are particularly visible, while those involving indirect signals (e.g., announced capacity expansion), process changes, or raising exit and shrinkage barriers are often less visible.

The likelihood of a defensive tactic’s being noticed and understood is a function not only of the tactic but also of the likely challengers. Competitors without a good cost system may not understand the impact of a defensive tactic on their cost positions. In addition, challengers’ assumptions about the industry and about the firm will influence their interpretation of the firm’s behavior.

Credibility. A firm should select defensive tactics that will be credible. Defensive tactics differ greatly in the degree to which a challenger will take them seriously. A defensive tactic that raises barriers will not be credible unless challengers view it as a permanent or long- lasting feature of competition. The credibility of a threat of retaliation rests on having resources to carry it out and a communicated resolve to do so.

Impact on Competitors’ Goals. A firm should pick defensive tactics that have a measurable impact on the particular goals of its potential challengers. Since challengers’ goals may vary, not all tactics may be equally effective. Defensive tactics that are effective against a competitor with a similar ownership structure to the firm, for example, may not be at all effective against a state- owned competitor. Similarly, challengers will differ in their sensitivity to start-up losses and shortterm profits. Managers sometimes complain that they are attacked even though it is not “rational” to do so. Seemingly irrational attacks are often the result of a challenger having different goals. Defensive tactics should reflect challengers’ goals, and not the firm’s.

Other Structural Effects. A firm should select defensive tactics that have a positive or neutral influence on other elements of industry structure, and avoid those tactics that permanently erode industry structure. A new product generation that raises switching costs and encourages substitution, for example, is a better defensive tactic than a price cut that has the effect of increasing long- term buyer price sensitivity. Tactics that increase the perceived threat of retaliation sometimes have the undesirable side effect of creating rivalry pressures in an industry. Raising exit barriers, for example, can increase the risk of warfare among incumbents if they choose to follow. Leaders are particularly likely to influence industry structure through their defensive moves.

Defensive tactics may also hurt good competitors. Increases in advertising spending or price cuts can worsen the relative position of good competitors and compromise their ability to play the beneficial roles described in Chapter 6. Good competitors must perceive that defensive moves are not directed at them but at other challengers. Defensive strategy must not be set in a vacuum, then, but recognize its other structural effects.

Matching by Other Incumbents. Defensive tactics will usually have their greatest impact in defending against new entrants if they are imitated by other incumbents. Matching by other incumbents implies that a potential entrant cannot avoid the barriers created in defensive investments by attacking others in the industry. Smaller competitors may underinvest in defense and accept a free ride from the leaders, however. Efforts to prod other incumbents into matching a defensive move may well have a strategic advantage in industries where new entrants pose a greater threat than attacks by incumbents.

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

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