The process of entry or repositioning of the firm

Defensive strategy rests on an acute understanding of how a chal­ lenger views the firm and on the perceived profitability of the challeng­ er’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 deci­ sions and actions. Appropriate  defensive strategy   must  be formulated in the context of the entire assault, and not just one move. The appro­ priate modes of defense will change at different stages because of the challenger’s differing levels of commitment and investment as the pro­ cess 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 mar­ kets, 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  iden­ tity, 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 commit­ ment 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 m irrors  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 devel­ opment. In some industries, establishing even a foothold  position im­ plies 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 com­ mitment 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 can be predicted by   identifying costly   or   risky   investments  necessary in configuring the value chain. An  im portant  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 assump­ tions. Often a firm will know more about the industry  than  the chal­ lenger, 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 im portant impli­ cations 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  general­ ized, 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 defen­ sive investments where  they are most  needed.

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

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