One of the guiding principles in warfare (and by extension TPG2) is the concept of concentration of force. It doesn't necessarily mean that you have to have the largest army. You just have to have more fighting at any one point in space and time than the other guy. Consider the following:
These are somewhat extreme examples, but the principle remains sound. The general that has the most forces concentrated in space and time will generally win a conventional battle. In my experience with TPG2, the defending player tends to have concentration in time and the attacker tends to have concentration in space.
A general can concentrate his forces in a number of ways. The simplest is waiting until all of your reinforcements are grouped together before launching a major attack. This gives you concentration in both time and space. However, this tends to give the defender more time to prepare for the attack. This method is the most commonly used in TPG2 because it has the greatest effect within the rules of the game. The other methods are difficult to accomplish within the limited scope of TPG2.
A lot more complicated method is to attack from two or more directions simultaneously. This will give you concentration in time, but not in space. However, it forces the defender to disperse to cover all possible avenues of attack. In this case the loss of concentration of forces affects both sides, but generally affects the defender more. Of course, if the defender has time and a large enough force, he has the option of remaining concentrated in space and defeating the attacker in detail.
A third method (one I'm not particularly fond of) is the wave attacks. This concentrates all attacking forces on a narrow front, but over a longer period of time. These attacks wear the defender down. They can also allow units that attack later to remain a coherent unit, in some cases, even after penetrating the defender's line. Of course, this should only be attempted by an attacker with a much larger amount of forces than the defender, otherwise, the defender has a chance of defeating the attacker in detail.
This is the basis for the tactical and/or strategic withdrawal. A general should have the ability to concentrate his forces so that he can stand a reasonable chance of defeating the enemy. In some cases, the general should (or must) allow the attacker to invade his territory. This will tend to spread the attacker out, while the defender concentrates his forces for a counter attack. This view is looked upon dimly by most politicians.
After a long discussion of this in a debriefing late one night, I began working on a scenario that would force the player to concentrate his meager forces to defeat the attacker. The Funnel was born. In this scenario, the defender starts out with four victory point locations, three of which are spread out along the 'front' and the fourth situated well behind the line. The terrain is such that by moving backward, the defender gains concentration of force. This concentration of force is what allows the defender to win the scenario.
I hope that by using the words 'concentration of force' we can avoid the nasty connotations of the word 'retreat'. Under some circumstances, the forward defense, followed by a tactical withdrawal to concentrate force, which leads to a rear defense is the best plan that the defender can use. An orderly tactical withdrawal that still allows combat (snipers, ambush, etc.) will help the defender by causing the attacker to become more disordered and spread out.