Resource allocation to defensive marketing and manufacturing strategies

Abstract

In this paper, we investigate the coordinated use of marketing and manufacturing strategies to formulate a defensive business strategy for an incumbent firm upon market entry. While defensive marketing strategies have been researched extensively, little has been done on defensive manufacturing strategies and even less on coordinating these two. We propose a formulation for the joint formation of a defensive strategy by the marketing and production functions under budget constraint considerations. The incumbent firm may allocate its resourcesto advertising and distribution expenditures, as well as to manufacturing investments to reduce the unit production cost. The incumbent firm has also the option of simply allocating all of its resources purely to advertising and distribution. We show that while there exist cases where the optimal reaction to entry involves investments in manufacturing improvements, there are also cases where defense is in marketing strategies alone. We identify the market conditions that promote such reactions to entry and also provide sensitivity analysis.