Any marketing action we take may be construed as an offensive move by our competition. In an effort to resist our attempts to increase market share, competitors may reposition their products, add new products, revise their segmentation strategies, or change prices. Thus, the sales and profit results of our positioning will be highly dependent upon how they react, and upon the dynamics of competition between our strategy and their new strategies.
Even if we do not modify our marketing strategy or act aggressively, competitors may attack our established products. When this occurs, it puts us on the defensive, and we must decide whether to allow our share to erode or to fight back with price, product, or other marketing actions. If we do fight back, it is probable that one or more of our competitors will react to our response, escalating the battle to an all-out war for consumer choice.
What is a firm’s best strategy for dealing with such dynamic competitive behaviour? Should it adopt an aggressive stance and defend its share to the last point? Should it regard competitive activity as a “war” and go all out to win? Or should it be more moderate and conciliatory in an effort to prevent a price war and to encourage stability, thus (hopefully) increasing profits?
Our focus needs to be on how to formulate a sound marketing strategy in situations where strong competitive reactions can be expected. Under such circumstances, decision making is difficult because the outcomes depend not only on our actions but also on the actions of our competitors. We should begin by asking how much a gain (or loss) in market share is really worth. Then consider the payoffs from various combinations of competitive decisions in a potentially destructive game, and suggest that analogous situations often occur under real-world business conditions. Now outline several alternative generic, competitive strategies, and recommend a method for evaluating and selecting the most effective. Finally, review the analytical models available to help managers cope with the myriad complexities of intensely competitive markets.
The Role of Market Share
Conventional marketing wisdom holds that the best strategy is the one that results in the highest market share, and that managers should therefore strive to maximise the market shares of their brands. Implicit in this “wisdom” is the assumption that higher market share leads to higher profits and return on investment (ROI). If this assumption is true, the process of strategy formation is relatively straightforward. If it is not true, however, or if it is true only under certain conditions, it becomes necessary to test alternative strategies against both market share and profitability criteria. What, then, is the effect of market share on short- and long-term profitability?