Defensive strategy rests on an acute understanding of how a challenger views the firm and on the perceived profitability of the challenger’s various options for improving position. The formulation of defensive strategy must begin by recognizing that an attack by either a new or an established competitor is a time-phased sequence of decisions and actions. Appropriate defensive strategy must be formulated in the context of the entire assault, and not just one move. The appropriate modes of defense will change at different stages because of the challenger’s differing levels of commitment and investment as the process proceeds.
The process of entry or repositioning consists of four periods. I will discuss them first for the case of a new entrant, and later show how the same process applies to an established competitor seeking to reposition itself.
Preentry. This is the period before an entrant has commenced its entry, during which it examines the industry as an entry target. Investments by an entrant during this period typically are limited to market studies, product and process technology development, contacts with investment bankers regarding acquisitions, and the like. This is the hardest stage to detect, because the entrant’s intentions regarding entry are frequently not known with certainty. At the conclusion of the preentry period many potential entrants decide not to enter.
Entering. During this period an entrant invests in establishing a base position in the industry. This period involves such activities as continued product and process technology development, test markets, national rollout, assembling a sales force, and plant construction. The entrant hopes to have gained a viable position in the industry at the end of this period. The entering period can last a few months or several years, depending on the lead times involved in the activities necessary for establishing an initial position. In a service business, such as a restaurant, the period might only be a few months; in a natural resources industry it could be five years or more.
Sequencing. This is the period during which an entrant’s strategy evolves from its entry strategy to its long-run target strategy. This period does not occur in every entry, but reflects the benefits of a sequenced entry strategy in many industries.1 Procter & Gamble’s entry into the consumer paper products industry provides an example. P&G acquired Charmin Paper, a regional firm with little brand identity, and then repositioned its strategy by going national, investing heavily in advertising, and improving products. During the sequencing period, an entrant may take such actions as broadening its product line, vertically integrating, or widening its geographic coverage. These activities involve continued investment in the industry beyond the investment necessary to gain a foothold position.
Postentry. This is the period after entry has fully occurred. At this stage in the entry process, investment by the entrant has shifted to that needed to maintain or defend its position within the industry.
The process of repositioning by an existing competitor involves the same stages. A competitor first contemplates repositioning, then actually begins to invest in repositioning, and ultimately reaches or fails to reach its sought-after position. An established competitor may also reposition itself through a sequence of steps. Therefore, the initial moves a challenger makes in repositioning often do not reliably indicate its ultimate target strategy.
The stages in the entry or repositioning process are important to defensive strategy for a number of reasons. First, a challenger’s level of commitment to its strategy may well differ in the various stages. Generally, a challenger’s commitment increases as it progresses in the process if some success is achieved. The initial level of commitment to an entry or repositioning strategy will vary, reflecting the unanimity of management opinion about the appropriateness of the decision in the first place and the attractiveness of other opportunities available to the challenger. However, commitment will tend to rise as decisions are made, resources are committed, time passes, and the strategy progresses. The level of commitment of a challenger is crucial to defensive strategy, since it mirrors the difficulty of forestalling or limiting a challenger’s objectives.
Exit and shrinkage barriers will also tend to rise as the process proceeds.2 The presence of high exit or shrinkage barriers make it difficult to dislodge a challenger or force it to limit or scale down its objectives. Exit and shrinkage barriers increase as the challenger commits to specialized assets, long-term contracts, horizontal strategies with sister business units, and investments in product or process development. In some industries, establishing even a foothold position implies the creation of significant exit barriers. In other industries, a challenger may be able to postpone the risk of increasing exit barriers until late in the entry process.3 Developing an understanding of the height of a challenger’s exit and shrinkage barriers and how they will change over time is essential to defensive strategy.
Defense becomes more difficult the greater are a challenger’s commitment and exit barriers. Since commitment and exit barriers usually rise, often in discrete steps as investment commitments are made, the timing of defensive moves is critical. Defensive actions taken just before a challenger must decide whether to take steps that will raise exit or shrinkage barriers may cast a shadow over the challenger’s internal decision-making process.4 Critical junctures for a challenger Shrinkage barriers, discussed in Chapter 6, are barriers to reducing sales volume. They are closely related to exit barriers.
Postponing of risk is one of the important motivations for a sequenced entry strategy. 4Much research by economists on entry does not recognize that entry is an extended investment process, and hence concludes that many entry-deterring investments are irrational once an initial entry investment has been made. For example, see A. Dixit (1980). An example would be a firm that attempts to deter entry by building excess capacity as a threat to potential entrants that a price war will be triggered if they can be predicted by identifying costly or risky investments necessary in configuring the value chain. An important principle of defensive strategy, then, is to take defensive action before exit barriers have risen.
A challenger learns continuously as its entry or repositioning process proceeds. Assumptions were made in its initial decision that experience will verify or contradict. Its experience will also shape its future assumptions, and a challenger may modify its strategy based on events early in the process. This presents the defender with an important opportunity to shape a challenger’s information and assumptions. Often a firm will know more about the industry than the challenger, and may be able to predict better than the challenger where the challenger’s strategy will lead. This may allow a firm to influence the direction of a challenger’s strategy in such a way as to minimize its negative impact.
A defender must also try to prevent a challenger’s commitment from building. When considering risky and uncertain moves into new territory, a challenger’s management may be particularly sensitive to setbacks or signs of early success or failure. A skillful defender seeks to prevent a challenger from meeting its initial targets and attempts to change industry competition in such a way as to cause the challenger to question its original assumptions about the attractiveness of the industry or a particular position.
As the entry or repositioning proceeds, uncertainty about the intentions of the challenger diminishes. This also has important implications for defensive strategy. Before entry or repositioning begins, a firm can only speculate about the identity of potential entrants or of competitors intending to launch an attack. Once entry or repositioning begins, however, the identity of the challenger becomes known. The challenger’s strategy and long-term intentions may still not be clear at first. However, they will emerge more clearly as the process proceeds. A challenger’s ultimate strategy will not be known until well into the sequencing stage when significant investments have been made.
A firm cannot defend against attacks of any conceivable type, mounted by every conceivable competitor or potential competitor. Therefore, defense before a challenger appears must be more generalized, and effective defense of this type can be very costly. Once a challenge is under way, defensive strategy can be tailored to meet the threat posed by a specific challenger. A principle that emerges is that there is a high payout to anticipating which firms represent the most likely challengers and what their logical avenues of attack might be. This will allow defense to be more cost-effective, by focusing defensive investments where they are most needed.
Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.