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Defensive marketing wins for AGSM top gun

AUTHOR: Deborah Tarrant   DATE: 12.04.06   ISSUE 1, 2006

Yet the importance of developing and deploying defensive marketing strategies to ward off the threats posed by fresh competition is frequently under-rated.

The way an organisation responds when a new rival appears on the scene can significantly lessen the impact of a newcomer plundering its customer base, allowing the established player to retain the ‘right’ customers and shed the less profitable.

When a new player or product comes on to the market, almost invariably at least one existing player must defend its position.

Illustration: Gregory Baldwin

Trailblazing research by John Roberts, professor of marketing with joint appointments at AGSM and the London Business School, published in the November 2005 issue of Harvard Business Review, provides an exemplary case study showing how Telstra effectively used defensive strategies to meet the challenge posed by new rival Optus when the Australian telecommunications market was deregulated in the mid-1990s.

Professor Roberts worked as a consultant to Telstra. At the time the then wholly government-owned organization faced its first competitor. His paper, Defensive Marketing: How a Strong Incumbent Can Protect Its Position, outlines how Telstra used a range of strategies to ward off Optus’s attack.

As the paper reports, incumbents have strong advantages, such as the resources to support extensive advertising campaigns, and strong disadvantages with customers already experiencing the weak points in their service offering, while newcomers have a distinct advantage in being able to ‘cherry-pick’ from the most valuable market segments.

Vital to Telstra’s defence strategy was the development of a model by Professor Roberts with fellow consultants, marketing analyst Charles Nelson and UNSW Marketing Professor Pamela Morrison, that allowed Telstra to predict customers’ responses to Optus services. The model could be used to predict Telstra’s share loss and by identifying the drivers of that loss, it allowed the effect of proposed Telstra strategies to be tested. Technical aspects of the model appear in the top quantitative marketing journal, Marketing Science, in Spring 2004 and Winter 2005.

In one dramatic about-face, the predictive model prompted the telco to change its initial plans to match Optus outright on pricing. Instead Telstra offered a tailored mix of pricing, cheaper at certain times of day and for certain types of calls, thus avoiding a direct head-to-head price war.

In another instance, Telstra was able to determine which of its valuable customers were likely to switch providers, the “valuable vulnerables”, and develop attractive services to keep them.

Understanding the ‘weapons’ available to defend its position and the range of defensive strategies applicable meant six months after Optus launched, Telstra’s market share was still 12 times bigger than its rival’s.

The case study provides a salutary insight into how a large organisation can act with agility when facing an attack. One of Telstra’s winning tactics was being prepared in advance of Optus’s launch.

However, the culture of many organizations is against defensive marketing, says Professor Roberts. Typically they focus on growth through the acquisition of new customers in preference to defending their position. “There’s the adage that it costs seven times as much to win a new customer as it does to keep an existing one. It’s a lot easier to reduce the attrition rate than to have major acquisition strategies,” he says.

Professor Roberts’ work has moved on to explore more complex multiplayer games, the dynamics involved and how defensive marketing can evolve over time.

Photo: Professor John Roberts

Accordingly, Professor Roberts noted in his paper that much research has focussed on offensive tactics but “little [exists] on how strong incumbents can use marketing to pre-emptively respond to new or anticipated threats…”

Professor Roberts’ work has moved on to explore more complex multiplayer games, the dynamics involved and how defensive marketing can evolve over time.

Some clear messages emerge from research into defensive marketing, he says.

The first is to focus on the customer, and not the competitor. “Good marketers understand the needs of the consumer and meeting those needs better than anyone else. Recognising the competition, its activities and having strategies to beat it is important, but the customer is always the main game.

“Much of the language of defensive marketing has its origins in trench warfare. While the competitor is the adversary, the customer is the terrain on which you are fighting – and not all parts of the battleground are the same,” says Professor Roberts. Understanding the differences between customers (customer heterogeneity), and the perception of an organisation from the customer’s point of view is vital. “You need to understand where you can win because it’s pointless fighting losing battles. Equally, you want to win with valuable customers – not those who are going to be a net drain on the organisation’s resources.”

Sending signals to competitors is an important defensive strategy.

“When attacked, the obvious reaction is to retreat. The only problem is that heightens the likelihood of further attacks,” he says.

Retaliation – striking back hard when attacked – will make a competitor think twice about attacking again, advises Professor Roberts. “In the short term it may seem costly, using up effort and energy, but it sends a clear signal.” Professor Roberts points to the example of global consumer goods giant, Procter & Gamble, which has a reputation for fierce retaliation when under attack. Initially this doesn’t seem profitable but in the longer term it ensures no competitor attacks the company lightly.

Much has changed since the days that Telstra first faced opposition from Optus. “At the time the thinking was that you had to fight for every last customer,” says Professor Roberts. With the proliferation of sophisticated, technology-powered Customer Relationship Management (CRM) tools and strategies, a greater grasp of how to retain and maximise the value of the right customers has been developed.

Despite this, the use of defensive marketing is still not extensively employed, he says. “While organisations understand day-to-day trench warfare of making raids into competitors’ territories, they often do not understand and foresee major change. Not putting extensive defensive strategies in place when there’s data in the marketplace showing a competitor is about to have a major initiative is reprehensible,” he says.

Customer focus has been the greatest evolutionary shift in marketing observed by Professor Roberts in a distinguished career that most recently saw him appointed a Scientia Professor at the University of NSW in honour of his international reputation. Among numerous awards, he has received the American Marketing Association’s prestigious O’Dell Award for the most influential marketing paper in the previous five years and more recently the Best Paper Award at the 2005 Australian and New Zealand Academy of Marketing Conference.

Professor Roberts began his career as a statistician in the forecasting section of the Postmaster General’s Department at the time it became Telecom Australia, the predecessor to Telstra. The Forecasting Branch he headed was moved to the Marketing Division and, at 25, he was appointed the organisation’s first Market Planning Director. “I died and went to heaven when I became a marketing executive,” says the professor who went on to study marketing at MIT in the US, completing an MBA and PhD.

Since then marketing has shifted its sights from what the organisation does – the traditional four Ps (product, place, price and promotion) – to zoom in on the customer. Among the major changes wrought by the CRM revolution, from Professor Roberts’s perspective, has been the upgraded status of sales people who are now receiving well-deserved recognition and education. “The days of hard sell are numbered, and we’re getting more sophisticated customer analysis,” he says.

One of the benefits of his career has been the industry relevance developed through working on both the academic and the practical side of marketing. Apart from his early roles, Professor Roberts also established Marketing Insights, one of Australia’s biggest marketing strategy consultancies, and has worked on projects with many Top 100 companies.

His research concentrates on marketing strategy and practice and the marketing of new products and services, with current projects including how much of a customer’s mind it’s possible to own, taste formation and the use of epidemiological models to analyse product acceptance at specific population levels.