Defensive Strategy

Protect profit streams against competitor attacks

The objective of defensive business strategy is to fend off competitive attacks. As part of the regular course of business, new threats emerge all the time as challengers try to take a piece of the action. Even when the firm is in a strong competitive position with stable cash flows, it can become exposed to new threats and vulnerabilities. For these reasons, defensive strategy is vital to the competitive standing of the firm.

Are you experiencing these issues?

Customer defections

Market share erosion

Business disrupted by competitor

Robust markets shrinking

Business disrupted by technology

Compromised business performance

Any of these issues indicate that your business is coming under attack. Two things need to happen quickly back to back: (1) focus your defensive strategy on the critical strategic control points in your market, and (2) execute your defensive strategy rapidly. Fail either one, and your business becomes at risk.

Our Approach

Our first step is to look at the threat from the “outside-in” to reach a robust understanding of the company’s situation, including competitors, customers, and market forces. Next, we identify the strategic control point in question and formulate a strategy to reinforce it. As a result, the response is precise and highly targeted to the threat.

The second step is to help the company execute its defense rapidly, i.e., organize, perform, and track. The ultimate objective is a response that is swift and coordinated companywide in counteracting the threat.

How We Help

Build robust defensive strategies around strategic control points in your industry.

Understand and manage the effects of an attack

Nature of the threat vs.barriers to entry, including

Economies of scale
Product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Cost advantages
Favorable access to raw materials
Favorable locations
Experience curve effects
Government subsidies

Form of competitive attack and intensity of rivalry, including

Industry growth
Competitor concentration
Commoditization
Profit model
Fixed cost vs value added
Competitive advantage
Capacity added in large chunks
Product differentiation
Brand strength
Switching costs
Business complexity
Exit barriers

Intellectual Property

IP protection with patents
Example: Biotech, pharmaceuticals, media franchises

Proprietary Knowledge

Trade secrets or unique expertise gained by working smarter, difficult to replicate
Example: Coke, Airbus, Space X

Cost
Advantage

Economies of scale, scope, experience
Example: TSMC, Intel - microchip manufacturing

Lock Access To Raw Materials

Lock access to raw materials and input resources
Example: Rio Tinto, Anglo American, Alcoa - mining rights

Brand
Name

Established tradition, connotation
Example: Rolex, BMW, Mercedes - icons

Data
Advantage

Ownership of exclusive proprietary data
Example: Pandora customizes radio stations to individual users’ preferences. Facebook tracks user behavior for online advertisers

Network
Effects

Increased value of product or service with use
Example: eBay, Amazon, Google Maps, Twitter

Market
dominance

Market Share Leadership
Example: Lockheed Martin, Cargill, Fidelity - largest in class

Lock Distribution Channels

Lock access to market channels
Example: Walmart, Target - retail locations

Customer
Loyalty

Trusted connection built on positive experience
Example: Apple, Costco - repeat buyers

We provide the appropriate defensive strategies as dictated by the threat.

Pre-entry defensive strategy

We assist clients in building a pre-entry defensive strategy that discourages a challenger from entering the market, making the entry too difficult or too costly to pursue ...

Pre-entry defensive strategy

The objective of a pre-entry defensive strategy is to discourage a challenger from entering the market by making the entry too difficult or too costly.

Pre-entry threats are staged by new entrants. Usually, it is much easier to fend off challengers before they enter the market than once they make significant investments. For this reason, the firm needs to take timely action.

The type of response depends on the strategic position of the company and the relevant strategic control points in its industry. Typical actions include locking up delivery systems, blocking access to suppliers, expanding capacity, and much more.

Post-entry defensive strategy

We help clients bolster a post-entry defensive strategy that keeps the competition from building a strong market position or gain share with new forms of participation ...

Post-entry defensive strategy

The objective of a post-entry defensive strategy is to keep the new entrant from building a strong market position.

Post-entry threats come from firms that have already entered the market or from incumbents that are threatening to gain market share with new forms of participation. By this stage, new entrants or incumbents will have made investments, so the stakes are high.

Frequent actions involve introducing “firewall” brands, widening product lines, adopting continuous improvement to outdistance competitors, cross-parrying on a specific market segment, and much more. The logic is to defend one’s market position when the rival is small and weak before it becomes a serious threat.

Defense Against Substitutes

The objective of defending against a substitute is to preclude the substitute product from taking hold. Factors that determine a higher threat of substitutes in the industry include ...

Defense Against Substitutes

The objective of defending against a substitute is to preclude the substitute product from taking hold. Factors that determine a higher threat of substitutes in the industry include the following:

Customer can easily switch between existing products and new substitutes
Substitutes are readily available
They have better features, quality or value comparable to products in the market
They have a lower cost

Examples of defensive actions against substitutes include the following:

Increase product differentiation by innovating. improving product features and engaging in tactical pricing
Develop, maintain, and re-enforce a strong brand and image to preclude switchovers
Re-frame your market focus to a profitable niche
Adopt special offers, including discounts, trials, gifts, special packages
Recognize evolving key customer expectations and improve satisfaction
Improve customer relations through the acquisition of customer data and proper communication
Research customer needs and wants and competitive threats from substitute products early on in their development

The end game is to focus on the right strategic control points to block substitutes early on.

Business Model Design Stabilization

We help stabilize companies whose business model has come under severe competitive attack, including disruption, industry-wide value shifts, or stalemate competition. We help redesign the business model ...

Business Model Design Stabilization

A company may come under attack due to disruption, industry-wide value shifts, or stalemate competition. In each of these cases, management may need to redesign the business model to defend the business and stabilize the competitive position of the firm.

We assist clients to improve business designs, including relationships between buyers and suppliers, distributors and manufacturers, subcontractors and outsourcers. Our approach examines fundamental assumptions of the business, including the following:

Emphasis on analyzing the underpinnings of the destabilizing factors, including disruption, flat markets, or stalemate competition
Focus on examining the value shift in the industry, how and where value is migrating across the value chain
Identification of new forms of competition originating from outer regions of the industry, including new technologies, new capabilities, and new cost structures
Questioning fundamental assumptions about how customers are changing, what they value, their priorities
Examining the profit drivers of the business
Deciding how to differentiate, which customers to target, what products and services to sell
Designing the company’s value capture mechanism
Securing the relevant strategic control points in the industry to build a fortress

The Results You Can Expect

Secured relevant strategic control point(s)
Targeted measured response
Protection of your cash flow stream
Sustained defensible position

How We Have Helped Clients

Scooter Manufacturer

Strengthened the company’s distribution channels to preclude competitors from entering its home market.

Automotive Retail

Digitized customer-facing processes being disrupted by the competition.

Jet Engine Service Provider

Stemmed defection of airline customers and reversed deteriorating profitability.

There are two categories of defensive strategy: (1) pre-entry strategy, which comprises actions taken by firms to preclude challengers from entering their market, and (2) post-entry strategy, which involves actions taken by companies against challengers in the market.

In all cases, effective defensive business strategy aims to secure the relevant strategic control points. These are defensive mechanisms that protect the company’s profit streams against erosion from competitors, customer power, and supplier power. Examples include having a dominant market position in attractive segments, locking up distribution channels, controlling the value chain, owning a de facto business standard, and many more.

When coming under attack, best-practice responses involve taking a clear read of the situation, identifying the relevant strategic control point, and countering with the right action.

PRE ENTRY DEFENSIVE STRATEGY

The objective of pre-entry defensive strategy is to dissuade a challenger from entering the market by making the entry too difficult or too costly. Some common actions include protecting all bases, locking up distribution channels, denying access to suppliers, or expanding capacity. If the challenger has just entered, the defending firm can respond by guiding the attack to areas less desirable to the new entrant.

The following case illustrates the power of a strong pre-emptive 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.

POST ENTRY DEFENSIVE STRATEGY

The objective of post-entry defensive strategy is to preclude the new entrant from establishing a strong market position. Some common actions involve introducing new products, maintaining a competitive lead through continuous improvement, cross-parrying, or counter-attacking on a select market segment. The key is to defend one’s position while the challenger is small and vulnerable before it becomes a serious threat. If the challenger gains a strong position, the defender may opt for a contraction defense; i.e., shrinking the business to a more defensible position.

The following two cases illustrate powerful post-entry defensive strategies.

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.

MAKING STRATEGIC MOVES THAT MATTER

In each case, management responded smartly by focusing on the strategic control point that mattered. Waging an effective response is an effort that requires careful planning and execution and involves three critical steps:

Taking a clear and definite read of the situation
Focusing on the right strategic control point
Responding to the challenger with the correct action

Defensive strategy is essential to the existence of the firm. While a robust defensive strategy can act as an offensive strategy at times, the contrary is not true. Without a strong defense, even the most powerful companies will lose. Therefore, it pays to put into operation a well-planned defensive strategy.

Article

Business Strategy: Why strategic control points count

Article

Defensive Business Strategy: When failure is not an option

Article

Defensive Strategy

Are you experiencing these issues?

Our Approach

How We Help

Pre-entry defensive strategy

Pre-entry defensive strategy

Post-entry defensive strategy

Post-entry defensive strategy

Defense Against Substitutes

Defense Against Substitutes

Business Model Design Stabilization

Business Model Design Stabilization

The Results You Can Expect

How We Have Helped Clients

Business Strategy: Why strategic control points count

Defensive Business Strategy: When failure is not an option

How are you defending your business against an attack?