In a perfect world, you would come up with a business idea, develop a product or service, and then sell it — without any regard to the competition.
Of course, that doesn’t happen. In order to succeed, businesses need to always be looking at what rival firms are doing. This is especially true when a company is trying to enter a new industry or prevent others from joining an already crowded market.
Companies need to engage in either offensive or defensive strategies to fend off competition. According to Peter Yannopoulos’ “Defensive and Offensive Strategies for Market Success” — which appeared in the International Journal of Business and Social Science in July 2011 — these moves will impact one another, forcing companies to respond in various ways. Businesses will gain or lose market share or focus instead on a new market that is undefended. It is a real life game of chess but on steroids.
So what’s the difference between an offensive and defensive strategy?
Mostly, they are just two large collections of various techniques a company can utilize; attacks are intended to take new market share while defenses are meant to guard and protect market share while also deterring potential rivals.
Since fewer resources are required to defend, it’s easier to guard than attack, Yannopoulos notes in his article. Offensive strategies can certainly be effective, but also have the potential to invite serious retaliation from rival companies.
GOING ON THE OFFENSIVE
The clearest offensive strategy to understand is the direct, frontal attack. A company could choose to copy a rival’s products, pricing model, and advertising campaigns — often inviting a war with a rival firm. Oftentimes, notes Yannopoulos, companies will choose a limited frontal attack, focusing on one particular element like price or quality.
As one may imagine, frontal attacks have the potential for the most retaliation. They therefore succeed whenever the defendant is limited in its options to fight back; for example, the rival firm may not be able to cut prices due to shareholders’ profit expectations.
Frontal attacks require a lot of money and manpower. If a defending firm is well established, an attack requires at least 3 times as many resources, said Yannopoulos.
An alternative to the frontal attack is an “indirect attack” — an offensive move that is masked or hidden.
Some examples include:
- A flanking attack hits competitors where they are most vulnerable. If a company has notably bad customer service or high fees, a company could choose to focus their efforts there, hurting the competitor in a masked but significant way. Companies that employ this strategy should be aware that they may inadvertently attract the attention and focus of new rivals in the process.
- Strategic encirclement essentially suffocates a rival company by surrounding it with multiple brands. The rival company (usually smaller and weaker than the aggressor) is unable to defend itself against all the attacks at the same time. It requires a lot of money, along with research and production capabilities, to successfully pull off a long-term encirclement campaign.
- With a predatory strategy, a company will cut its prices below costs, wait until a rival leaves the market, and then raise them again. Companies often will use the profits from one industry or product line to finances the cuts in another. It’s difficult to make this strategy last in the long term, and businesses need to be aware they could hurt relationships with suppliers in the process.
- Exploring undefended markets is a classic business strategy: if one market is filled with rivals, become the first to enter and thrive in a new market. Rather than taking on Coca Cola head-to-head in the soft drink industry, PepsiCo Chairman Roger Enrico decided in the late 1990s to focus instead on the supermarket; PepsiCo divisions Frito-Lay and Aquafina thrived and dominated the company’s profits. PepsiCo didn’t concede its soft drink business completely, although that is always a risk when using this strategy.
Smaller companies can attack too. In his article, Yannopoulos outlined some key strategies for companies that are taking on larger rivals:
- A guerilla attack strategy features small surprise attacks on a rival firm. This could include raiding supplies of a competitor’s business or offering coupons that attack a specific product. When used, this strategy comes with a high risk of retaliation.
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- In the Judo strategy, the smaller company uses its larger opponent’s strength as a weapon. Small Canadian airline WestJet, for example, used a similar pricing structure with lower costs to attack Air Canada; the larger airline had higher costs and were therefore unable to lower its prices. Smaller companies may often learn, copy, and modify the best practices of their rivals like Microsoft did when it copied the now-defunct Netscape Navigator web browser. Marketing can even be strategically used as a weapon; Drypers took on Procter and Gamble’s large couponing strategy by offering its own promotion that let customers turn in their P&G coupons for $2 off Drypers products.
- Small companies can also use an underdog strategy. By proclaiming their small status and promising an alternative to the status quo of large corporations, these businesses can gain customers.
DEFENDING THE TURF
Companies that are already established in an industry can use defensive strategies to fend off potential rivals. The main goal of a defensive strategy is to make a possible attack seem unappealing and not worth the return on investment, forcing rivals to abandon their plans.
The best defensive attacks occur right away before the challenger has time to enter the industry. These “pre-entry” defensive strategies include:
- Using signaling, a company will make announcements through statements, speeches, trade journals, or in the press about their commitment to the industry. They may hint at threats of retaliation or make promises to match rivals’ prices.
- In a fortify and defend strategy, a firm will raise barriers of entry; this will make it harder for newcomers to earn high profits and deter them from trying altogether. Automobile companies — through economies of scale, specialized technology, access to raw materials, and more — have succeeded in making it very difficult for newcomers to join in on the competition.
- Similar to an encirclement strategy, covering all bases involves adding new products to create a “full product line.” This prevents a rival company from capitalizing on a new product that isn’t already in the market. Cereal companies use this strategy often by introducing new brands of cereal to their product line. It does require a lot of resources, and there’s a risk of spreading resources too thin.
- In continuous improvement, a company will constantly focus on improving their quality, making their production methods more efficient, and lowering their costs. This will help them succeed in staying one step ahead of rivals, but does mean that they will need to make their own products obsolete (e.g. Apple releasing new versions of the iPhone each year) in the process.
- If there are high capacity costs in an industry, a firm can undergo capacity expansion and add even more excess capacity as a deterrent for newcomers.
There are also some strategies to defend against rivals after they’ve entered the industry.
Companies can continue to fight back asserting their position (e.g. making it clear that price-cutting attacks will be answered with retaliation) especially when a rival is small and vulnerable.
A business could choose to introduce a “fighting brand” — a lower-priced alternative to a rival’s primary product. When Heublein, the maker of Smirnoff, was attacked by a rival they increased the cost of Smirnoff and added a new product with a lower cost; this allowed them to take on the rival without negatively impacting their core product.
Companies can also engage in a cross-parry with a rival. When Michelin lowered the prices of is tires in North America, Goodyear did not cut its North America prices but instead did so in Europe. This defensive move hurt Michelin and forced them to rethink their strategy.
There’s also the Pivot and Hammer strategy, a combined offensive-defensive business strategy coined by Evan Dudik. The Pivot represents a company’s ability to defend itself against rivals and maintain sales despite competition. The Hammer is the company’s ability to attack its competitors. Companies that employ this strategy need to focus on both parts – offensive and defensive — in order to succeed. The more that the Pivot can successfully guard against the competitors, the harder the Hammer can strike.
Now that you are aware of these strategies, you can foresee what the competition will do and you can also use tactics that will protect yourself from an attack. A game plan is essential for long term success in any industry - and now you have some tools to work with.
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