Complete Guide to Defensive Strategy

Defensive strategy is defined as a marketing tool that helps companies to retain valuable customers that can be taken away by competitors. Competitors can be defined as other firms that are located in the same market category or sell similar products to the same segment of people.

What is Defensive Strategy?

A defensive strategy is a marketing tool that is used to protect the current market share. Defensive strategies are also known as “marketing shield”. A company that uses defensive strategies to protect its market share will lose competitive advantages in the long run.

The phrase “Defensive Marketing” has been used in many different ways.

The phrase is used to refer to a company that enters a large market but without undertaking a full-scale marketing attack to try to tear the market away from the large market leaders.

The phrase is also used to refer to a marketing strategy that is used to protect market share in a mature market.

The phrase is also used to refer to a strategy employed by a company that is made up of a business unit that is having trouble remaining afloat.

The phrase is also used to refer to a company that fails to match the current market conditions and as a result can no longer be relevant.

In this document, the phrase “Defensive Strategy” is going to be used to refer to a marketing strategy that is designed to protect market share. The purpose of using defensive strategy is to protect existing market share in a market category.

Benefits of Defensive Strategy

1. Defensive strategy helps to protect current market share . If a company wishes to continue its existing market share, it should use defensive strategies to protect its market share. This is true even if the company is already a leader because the company can also lose market share if they fail to react to the tactics used by the competitors.
2. Defensive strategy can give the company the confidence to continue on with a particular strategy . Defensive strategy helps a company to build confidence that it can continue on with its existing strategy. The case of Johnson & Johnson Band-Aid is a good example of how defensive strategy can help a market leader. Band-Aid in the 1960s was losing market share rapidly to an innovative competitor called Top-Coat. Johnson & Johnson were scared by Top-Coats attack and to protect their market share, J&J developed a new product called Extra-Tough Band-Aid that was extra sticky and combined this with a low range price, thus J&J were able to hold onto its market share in Band-aid.
3. Defensive strategy can aid in developing new strategies for the future. Defensive strategies are developed to protect the current market share but if a company can identify how competitors are attacking them, they can incorporate the same strategy into their own plans and in doing so; the company can ensure that they are not left behind by its competitors.
4. Defensive strategy can protect market share and increase profitability at the same time. The advantage of having a low cost structure compared to that of a competitor means that a company can use defensive strategies to protect its market share and at the same time, increase profitability.

Risks Associated with Defensive Strategy

1. A defensive strategy can become a permanent strategy . A company is unlikely to abandon defensive strategies. This can result in the company becoming complacent and not responding well to changes in the market.
2. Defensive strategies can increase the cost of marketing efforts . A large firm will need a large marketing budget to maintain a strong presence in the market and to fend off competitors. This can lead to high costs which if not monitored can result in sales declining.
3. Defensive strategies can keep customers in the product category but out of the firm specifically . Using defensive strategies to protect the current market share can mean that customers will stay in the product category but will buy from their competitors in the hope of getting something better.

The Defensive Strategy Process

Defensive strategies are best developed in response to confirmed market intelligence data that indicates that competitors are attacking the firm’s market share.

Step 1 – Internal Analysis : A company must conduct a thorough internal analysis to determine its strengths, assets, weaknesses, opportunities and threats. Detailed analysis from the firm enables them to understand how strong the competition is and will give the company an advantage over its competitors. Look at the market structure and understand how your competitors and you will fare in the future based on these changes.

Step 2 – External analysis: A company must conduct a thorough analysis of the competition including the following:

• Size.
• Resources.
• Product quality.
• Sales force.
• Distribution.
• Advertising and other promotional activities.

Step 3 – Find the market share opportunities and unmet needs: Identify the strengths, weaknesses and opportunities to locate the market share opportunities and unmet needs.

Defensive Strategy  –  Offensive Strategy – Selective Offensive

Selective Offensive

Introduction:

Selective offensive strategy is commonly used and involves a company attacking its competitors on one side of the market.

This strategy is a common strategy used by companies. A company defines a particular market segment that they want to enter and they then use a strategy to enter the market. There is a difference between “selective” offensive and “unilateral” offensive strategies. In a “unilateral” offensive strategy, a company will try to enter a market that is currently not served by any company.

A “unilateral” strategy is a higher risk strategy compared to a “selective” strategy but a “unilateral” strategy can also offer huge rewards if successful.

Unilateral – Riskier than “Selective”.

A unilateral offensive strategy is also known as “direct entry” and generally involves a company attacking the leading market players head on.

There is a high level of risk involved in following a “unilateral offensive” strategy as it involves trying to enter to a market that does not have any competitors.

Benefits to the company using “Unilateral” Offensive Strategy

1. First mover advantage. The first mover advantage means that the company is the first company to enter a market. This can result in the company having the most dominant position in the market. It can also offer quick rewards if a company can be the first mover into a niche market.
2. The larger the market, the more important it is to have a large share. The larger the market size is, the more important it is for a company to have a large market share. This is especially true when a company is able to be the first to occupy the market.

Risks Associated with “Unilateral” Offensive Strategy

1. Competing against other large players in the same market. A company that uses a “unilateral” strategy will have to compete against other large competitors in the same market. The risks involved include competition between prices, competition on quality, competition form advertising and a high level of competition on promotional activity.
2. Customers risk losing their current supplier in the event of defections. In the event of switching costs being too low, a company could lose customers to competitors if there are a high number of defections.
3. A small number of new competitors could damage market share significantly . A company must make sure that they are able to have a sustainable advantage and that they can absorb the competitors that will try to enter the market.
4. A monopolizing offense will result in competitors taking counter-measures. When a company pushes for maximum market share, competitors will respond by making moves to reduce market share on the part of the company. A company must be able to respond to this.
5. Too high a share of a small market will result in a low sales growth rate and no barrier to entry. If the share is too high then a company will have a hard time maintaining a high sales growth rate and it will also present entry barriers to other companies.
6. As customers defect, the number of customers will decrease and at some point, the company will run out of customers.

A company facing too many competitors will have to lower prices and operate at a break even or low profit margin to prevent the competitors from gaining too much market share. This will result in small profit margins for the company.

Other Risks Involved in Unilateral Offensive Strategy ?

1. Delayed Reaction. A company and its competitors may not be able to detect a threat until it is too late and the initial reaction will be slow. Due to the small size of the market, the company will not easily be able to react to a threat.
2. Overview of market shares. It may not be possible to make comparisons because the market is not mature enough and too many variables need to be taken into account such as entry costs, cost of switching and type of demand.
3. Large companies will always have significant size differences which will result in long term pricing changes which can result in small profit margins and more threats. If the market is served by a large number of large companies, then the chances of the company being bought out or being taken over are high.
4. Competitive threats increase and the threat of new entrants will increase. The success of a company running a unilateral strategy will put a spotlight on the company and it will become a target for competitors. It is likely that the threat of entering the market will come from other large players.
5. Large companies will have many more resources and thus be able to respond to a threat.
6. If a company is able to survive as the leading company, then it will find it very hard to stay at the top. The other companies will try to consolidate the industry into just a few companies.

Some more definitions

Definition : A company in an “unilateral” offensive strategy will try to scare away competition while also penetrating the market as much as possible. This strategy is very similar to the “arms race” among superpowers during the cold war.

Definition : “Selective offensive” strategy is also known as “concentrated attack” strategy and involves a company taking a market share from a specific competitor.

While an “unilateral” strategy involves a company directly attacking multiple competitors in the same market, a “selective offensive” strategy involves a company attacking a competitor in a specific market.

Key questions:

What strengths and weaknesses does the company have?

What opportunities and threats does the company face in the market?

What is the level of competition in the market?

These are the main questions that an analyst should try and answer when using a “selective offensive” strategy.

The first step in the process is to gather as much information as possible about the company. The analyst should list the opportunities and threats faced by the company.

Important things to consider include whether the company has strengths or weaknesses and whether the company faces strong or weak competitive threats. The analyst should look at the level of competition in the market and decide whether the competition involves many large competitors or a few large competitors. The analyst should also find out about the entry barriers that the company will have to overcome.

The analyst must look at each of these areas in turn and calculate an overall “competitive advantage” of the company and decide whether this advantage is sufficient. If it is easy to enter the market, then the company will not have a sustainable competitive advantage and it will be better off not entering the market.

Step 3 – Find the market share opportunities and unmet needs:

Analyst should work to determine whether there are any market share opportunities and unmet needs in the market. If there are, the analyst should try and find out what these opportunities are and how the company can take advantage of them.

There are many ways in which the company can take advantage of the unmet needs and the market share opportunities. One important way is by looking at the suggested strategies.

Recommended strategies for a “Selective Offensive” Strategy

1. Fix the price of a commodity

Example:

If a company is able to fix the price of a commodity that is used by large competitors in a market, then the company will be able to increase its market share.

2. Diversionary Advertisements for a rival product or a sideline business

Example:

Consider that a company is in the business of selling cars to retail customers. Then company is also selling service to rental cars to large customers like airlines at a very low price. The company can increase car sales to retail customers by running diversionary advertisements for the rental cars service.

3. Raising prices for high volume

Example:

This strategy involves a company taking advantage of the economies of scale that it can achieve in a market. The company may have large fixed costs so it can respond better to a competitor than it could to a small company.

4. Unilateral action on unprofitable markets

Example:

A company can try a unilateral offensive strategy in unprofitable markets in exchange for future profits. If a company is able to attack small and unprofitable markets, then it will be able to gain market share without having to worry about any threat from other competitors.

5. Fusion strategy combines “Unilateral offensive” and “Selective offensive”

Example:

A company can attack a competitor market by entering it quietly without using any great resources and then later, when the competition has been scared away using a unilateral offensive strategy, then the company can push for full ownership.

Key questions:

• What is the competitive advantage of the company?
• What opportunities or threats exist in the market?
• What is the level of the market share the company can achieve?

The most important thing that the analyst should look at is the competitive advantage of the company. The analyst must look at the resources that a company has and decide whether the company will have the ability to take on other companies.

The analyst must also look at the opportunities and threats faced by the company in order to evaluate the sustainability of the competitive advantage of the company. The analyst must also examine the market and see what kind of market share the company will be able to achieve. If the company cannot gain a significant market share then it should not make the move and enter the market.

Step 4 – Consider refinements of strategies:

Before actually entering the market, the analyst must look at other possible strategies and try to determine whether they would be more profitable.

If the company does not have a high level of confidence in its market share it should consider a strategy where it keeps a low profile and enters the market slowly. If the company does not have a well defined competitive advantage, it should consider a strategy where they seek to increase market share without making a lot of noise.

Step 5 – Execute the strategy:

The company should design a marketing mix. It can put the new product or service into the market. The company can promote the product in the right way.

It can advertise the product in a diversionary way in order to ensure that the competitors do not figure out what is going on. The company can give the product away free as the market is unprofitable. The strategy can rely on economies of scale in the high-profit segment of the market.

The whole point of the exercise is to get into the market and increase market share. Once the company is in the market, competitors will not be able to drive the company out. In order to build a long-term sustainable competitive advantage, the company must have a sustainable competitive advantage in the product or service. If the company must rely on economies of scale, it must have a sustainable competitive advantage in the high-volume segments of the market.

Step 6 – Gain competitive advantage

The company should think about its definition of sustainable competitive advantage. If the company needs to use economies of scale in order to gain a sustainable competitive advantage, then it should take into account the fact that it will have competitors.

If competitors come into the market and use economies of scale, then the low-volume segments of the market will become unprofitable. If demand is fairly inelastic, then the company will be able to sustain a competitive advantage in the market.

If a company uses economies of scale, then it must use its market power (that is, the power of its market share) to force the price of the commodity low enough to cover both the small and the high-volume segments of the market. The company’s price will cover the costs in the low-volume segment of the market and it will also allow it to gain a high margin in the high-volume segments of the market.

Step 7 – Find the best strategy

This step follows the evaluation process that we have discussed in the earlier sections. The analyst must select an appropriate strategy based on the strengths, weaknesses, opportunities and threats of the market.

Step 8 – Monitor and revise strategy

The next step in the analytical process involves monitoring and revising the company’s strategy. The company must keep track of its finances and the market. If the company finds itself under pressure by a new competitor moving into the price-sensitive segments of the market, then it may have to revise its strategy.

The company may have to move into the unprofitable market and use economies of scale to gain an unfair advantage. The company must constantly monitor the total industry’s supply, demand, productivity and external factors as they are the key to market entry, output and profit.

Step 9 – Evaluate success and the financial implications

The company must look at the success of the marketing strategy. It must also consider whether or not the strategy is leading to financial exchange. If the company is not gaining a sustainable competitive advantage through economies of scale or if the strategy is providing a sustainable competitive advantage but is not providing a financial advantage, then the company must consider whether or not it is advised to pursue this strategy.

Example:

If a company is unable to successfully increase market share by means of diversionary advertisements, then it should consider abandoning this strategy.

Step 10 – Adjust decision-making process

The company must direct all its efforts towards achieving sustainable competitive advantage. The company must thus attempt to use the best strategy for the money it can invest.