What it means
Businesses compete in two basic ways. A defensive strategy protects existing customers and profits from attack, while an offensive strategy goes after new ground.
The company chooses where to attack, how hard and with what resources. Common offensive moves include launching a better or cheaper product, undercutting competitors on price, and investing in advertising to win over their customers.
Others are buying a rival, opening in new regions and bundling products so that competitors' offers look weaker. A firm may also attack a rival's weakest segment, where the response is likely to be slow.
Offensive moves cost money, and the finance team must test whether the potential gain justifies the spend. Price cuts reduce margin on every sale, so a company needs enough extra volume to make up the difference.
Heavy marketing and product development spending depress profit in the short run, in return for a hoped-for gain in share and future earnings. Rivals will usually respond, and the response can erode the benefit.
A price war can leave every company with lower margins and no change in market share. Good strategists therefore ask what competitors can and will do, and whether the company has a lasting advantage such as lower costs, better technology or a stronger brand.
Offensive strategy suits companies with financial strength, a clear edge or a market that is growing and fluid. Companies in weak positions may find a more focused approach safer.
Managers should set clear targets, such as market share gain and return on the extra investment, and review them regularly.
In practice
Real-world examples.
Example
A budget airline cuts fares on a route dominated by an established carrier. It fills its planes by winning price-sensitive travellers. The finance team monitors each flight's profit so the cuts do not run too long, and it sets a limit on how many months the low fares may continue before the results are reviewed.
Example
A software company launches a free entry-level version of its product to win customers from a competitor. Some users later upgrade to the paid version, which brings in recurring subscription revenue at a much lower cost than traditional sales calls. The marketing budget is reviewed every quarter against the number of upgrades.
Example
A supermarket chain opens stores next to a rival's busiest locations and advertises price matching. Shoppers begin splitting their purchases between the two chains. Within a year the new chain has taken a noticeable share of local grocery sales, although the established rival has responded with its own loyalty offers and promotions.
Formula
Calculation
Market share = company sales / total market sales x 100
A market is worth $200,000,000 a year and a company sells $30,000,000 of it, so its share = 30,000,000 / 200,000,000 = 15%. After an offensive campaign of new products and promotions the company sells $38,000,000, assuming the total market is unchanged. New share = 38,000,000 / 200,000,000 = 19%, a gain of 4 percentage points, worth an extra $8,000,000 in sales.Case study
Seen in the real world.
Brightpath Mobile is a fictional phone service provider used to illustrate an offensive strategy. In this illustrative story, it held 12% of a $500,000,000 market and decided to attack a larger rival by offering a lower-priced family plan. The campaign cost $15,000,000 in advertising and reduced average revenue per customer by 8%.
After a year Brightpath's share reached 15%, and revenue rose from $60,000,000 to $75,000,000 despite the lower price per customer. The rival responded by matching the offer, so further gains slowed and the extra advertising was reduced. The board judged the move a success on share but noted that the response from the rival limited the long-term profit gain.
Brightpath's finance director later set out the lessons for the board. The campaign gave a net gain of $15,000,000 in revenue for $15,000,000 of advertising, so the payback depended on keeping the new customers for several years. She recommended tracking customer churn each month and setting a rule to pause the offer if churn rose above the level planned in the budget.
Watch out
Common mistakes.
- Cutting prices without checking the margin. A lower price needs a large volume increase to make the same profit.
- Ignoring the competitor's reaction. If rivals respond with similar moves, the gain may disappear and margins fall for everyone.
- Attacking without a lasting advantage. Without lower costs or a better product, any gains are usually short-lived.
Questions
People also ask.
What is the difference between offensive and defensive strategy?
Offensive strategy aims to win share from rivals, while defensive strategy aims to protect what the company already has.
Which companies suit an offensive strategy?
Those with financial strength, a clear advantage or a fast-changing market where share is still up for grabs.
How is success measured?
Typically by changes in market share, sales growth and the return on the money spent on the campaign.
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