Established companies, over a period, realize they cannot remain market leaders in every market segment they enter or have enjoyed presence in. As a result, they abandon unprofitable market segments or territories, for financial and branding reasons. This defensive strategy is called contraction defense.
A firm would typically withdraw its resources from its weaker footholds and channelize the saved energy into its stronger or profitable market segments. In certain cases, a business concentration could also lead to job cuts. Such a contraction defense tactic could be due to intense competition in the segment or the firm’s inability to survive and stay efficient. Generally, conglomerates or companies that diversify way too much can be seen retrenching later.
For example, Samsung has its presence in multiple consumer electronics divisions: mobile phones, televisions, cameras, computers, etc. Samsung dominates the mobile phone and television industry, but not the camera and laptop computers segment. This could be due to huge competition from Nikon and Canon (camera) and Apple, Asus, Lenovo, etc. (laptops). Samsung, under these scenarios, may choose to focus more on its stronger markets by taking a voluntary exit from its not-so-profitable domains so that it can focus more on its TVs and mobile phones, ensuring the newer companies that enter the industries it’s dominating do not turn into a major threat.
Least Favorable Defensive Strategy
Contraction defense is the last resort or the least favorable defensive strategy for any firm, since withdrawing or limiting presence from a sector would theoretically mean losing customers and cutting down revenue streams. But when it’s not possible to compete in a particular industry or if the specific sector is putting excessive toll on a company’s resources, contraction defense is the only way out.