Evaluating defensive tactics of the firm

The defensive tactics described above differ greatly in their charac­ teristics and in their appropriateness for a firm. A firm must  decide which tactics will be most effective in its industry in view of the poten­ tial challengers it faces. A number of im portant  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 in­ volve 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 aware­ ness or loyalty, for   example,   then  higher  advertising   spending   will have no defensive value because a challenger  need not  m atch 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 adver­ tising 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 challeng­ er’s   position   vis-a-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 indus­ tries 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 threat­ ening 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 o f 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   m aintain  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 o f the Message.      A   firm   should  select   defensive   tactics it is confident that potential challengers will detect as well as under­ stand their implications. Competitors  often differ in their  understand­ ing 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 rais­ ing 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 im­ pact of a defensive tactic on their cost positions. In addition,  challeng­ ers’ 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 chal­ lenger 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 tac­ tics that have a measurable impact on the particular goals of its poten­ tial challengers. Since challengers’ goals may vary, not  all tactics may be equally effective. Defensive tactics that are effective against a compe­ titor 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  short­ term 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.  M atching by other incumbents im­ plies that a potential entrant cannot avoid the barriers created in defen­ sive 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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