Defensive Strategy

Case 1: Pre-Emptive Defense / Locking Up Channels

A leading manufacturer of globally branded motor scooters was getting attacked in its home market by new entrant Honda. The Japanese models were cheaper, lighter, and better made. The company had a market share of 62% in its home market, and was completely exposed to the attack. Critical issues concerned preserving market share, including minimizing decrease in sales volume, and maintaining pricing. The relevant strategic control points in the market were as follows:

• Global brand recognition: manufacturers included brand names like Peugeot, PGO, Garelli, Piaggio, MBK, BMW, Honda, Yamaha, and Suzuki.
• Product differentiation: important criteria included distinctive design, product quality, light weight, durability, versatility of use, low maintenance, gas efficiency, and low carbon emissions.
• Price leadership: the company dominated its home market and operated as the de facto price leader.
• Distribution channels: manufacturers sold motor scooters through a national network of dealers.
• Marketing effectiveness: buyers need to be aware of the product and how it differentiates from the rest.

Management decided to respond by focusing on distribution channels as an immediate barrier to entry. At the time, its national coverage comprised dealerships of mixed performance: e.g., some selling small unit volumes, others experiencing decreasing margins, and a few operating at a loss. The company restructured its distribution network as follows:

• Reduced its distribution network by 120 dealers and shifted sales volume to fewer, stronger dealers
• Increased average dealer margins by $56,000
• With a leaner distribution network, cut its distribution costs by 10% and right-sized the company’s sales force
• As a direct result, increased company’s EBIT by $2.2 million

As a second step, management decided to in product differentiation. It introduced plastic-body models, which the Japanese companies had long favored, and gave its motor scooters stronger engines. It also marketed heavily, banking on the strong brand recognition and the star appeal of its products, managing to be classic without being outmoded. As a result, the company was able to maintain sales volume and pricing, minimize dealer defection, hold market share at home, and triple sales abroad.

Case 2: Position Defense / Improving Productivity

Jet Engine Shop was a leading provider of aircraft engine overhaul & repair services. It was experiencing declining profitability and the erosion of market share, having just lost two major customer airlines to Lufthansa Tecnik. The relevant control points in the industry were the following:

• Loyal customer base: The name of the game was repeated shop visits by major customer airlines
• Capacity: The industry suffered slow growth and excess capacity.
• Least cost position: Given slow industry growth and razor thin margins, low cost afforded sustainable operations. The firm enjoyed the least-cost position in the industry, but low asset utilization.
• Quality of service: Reliable engine overhaul service, including engine disassembly, cleaning, parts repair, new part replacement, and reassembly.
• Fast turn-around time: The competitor offered repair turn-around time (TAT) of 40 days. The firm’s repair TAT was 55 days, making up the difference by exchanging pooled parts and components across customer airlines.

The reason for customer defection was because they rejected parts pooling, i.e. substituting used engine parts from other carriers. This preference was particularly strong with new engines where airlines wanted original parts repaired, restored, or replaced by new ones.

Management decided to respond by improving the quality of service. The firm focused on internal productivity, shortening repair operations to achieve TAT of 33 days. By so doing, Jet Engine Shop was able to reduce excess inventory (spare parts, spare modules), save several $million, and hold its market position.

Case 3: Contraction Defense / Shrinking to a Stronghold

A leading manufacturer of plastic injection-molded automotive parts was being attacked by a new challenger. The firm was operating in a no-growth market and experiencing financial losses. it produced plastic injection molded hoods, doors, roof tops, grilles, engine covers, and bumpers.

The challenger was consolidating the industry by acquiring competitors in the plastic-injection truck parts segment. This market was attractive because (1) truck plastic parts were large (150 lbs for the caboose) and relatively easy to manufacture, requiring less precision to meet aerodynamic specifications, and (2) manufacturers had ongoing 10-year supply contracts with truck OEMs.

Given flat growth in the industry, the relevant strategic control points included the following:

• Capacity: in an industry suffering from excess capacity, companies were slashing prices to survive.
• Least cost structure: given the intense price war, least-cost manufacturers had the best chance to survive.

Management focused on these points and decided to respond by shrinking the business. It shut down two of seven plants, rationalizing 20% of its production capacity. This response enabled realigning cost and asset structures with realistic measures of demand, and gave the company a solid platform to continue its operations. The challenger was not able to consolidate production of the merged companies and eventually went out of business.