This paper considers a supply chain in which one manufacturer can encroach by selling directly and one retailer can encroach by developing a store brand, and investigates the impact of the manufacturer’s cost-reduction investment on bilateral encroachment. The bilateral encroachment game models both without investment and with manufacturer’s investment are established, and the equilibrium encroachment strategies of firms are obtained. The results show that under a certain condition, the manufacturer’s investment can prevent the occurrence of bilateral encroachment. On the one hand, the investment increases the retailer’s revenue from selling the manufacturer’s products in the traditional channel; on the other hand, it also enhances the competitiveness of the manufacturer’s products. Moreover, the higher the consumers’ valuation of the store brand, the more intense the competition between two brands. Therefore, when consumers highly value the store brand, it is more advantageous for the retailer to give up the store brand and focus on reselling the manufacturer’s products that have both product and cost advantages. Additionally, the manufacturer does not need to open direct channel to deal with the retailer’s encroachment under this situation.