Expanding Market Share

Market leaders can also grow by increasing their market shares further. In many markets, small market-share increases mean very large sales increases. For

Gillette is building on its strength in the marfeet place by moving into the women'smarket.

example, in the coffee market, a 1 per cent increase in market share is worth million; in soft drinks, $440 million! No wonder normal competition turns into marketing warfare in such markets. Many studies have found that profitability rises with increasing market share,14 Businesses with very large relative market shares averaged substantially higher returns on investment. Because of these findings, many companies have sought expanded market shares to improve profitability. General Electric, for example, declared that it wants to be at least no. 1 or 2 in each of its markets or else get out, GE shed its computer, air-eonditioiiing, small appliances and television businesses because il could not aehieve a top-dog position in these industries. Nestle intends to hold its position as the world's leading food company, although France's Danone also has designs on that spot. Both have been acquiring businesses, Nestle buying Perrier and Rowntree among others, while Danone own Jacobs, Kronenbourg, Amora, Lee & Perrins and IIP sauce.15 There are three main ways by which these firms can further increase their leading position.

WlN CUSTOMERS. Winning competitors' customers is rarely easy. Sales promotions and price reductions can produce increased share quickly, but such gains are made at the expense of profitability and disappear once the promotion ends. Exceptions to this are price fights stimulated by market leaders with more resources than competitors. The financial strength of Rupert Murdoch's global media empire has allowed him to gain share in newspaper and satellite TV markets by pricing very aggressively over an extended period. More often market share gains are achieved by long-term investment in quality, innovation or brand building. For instance, Mercedes C class model (replacing the ageing 190) helped the company increase its salc.s by 23 per cent. Sales were up 40 per cent in western Europe (excluding Germany), 34 per cent in the United States and 30 per cent in

Japan. !n Germany the 38 per cent growth gave a 2 per cent rise in market share. The company hopes to repeat that success with the much smaller A class.

WlN COMPETITORS. Leading mature companies often find it easier to buy competitors rather than win their customers. Sometimes this can launch the company into new sectors, as did BMW's purchase of the Rover Group with its small ears and cross-country vehicles, or the £23 billion merger of GrandMet and Guinness to form Diageo, the world's largest alcoholic drinks company. More often it is a dash for firms to achieve scale by acquiring businesses similar to themselves. This is occurring among European insurers as Zurich bids for BAT Industries' insurance arm, Allianz AG and Credit Suisse battle it out over Assurance Gcncralc de France, while Generale de France itself fights for Warms, and Prudential bids for Scottish Amicable."'

WlN LOYALTY. Loyalty schemes have grown hugely in recent years. At their best these are attempts to build customer relationships based on the lon£-run customer satisfaction discussed in Chapter 11, In the UK grocery market Tesco challenged and overtook Salisbury's as the market leader by introducing a hugely popular loyalty scheme while Sainsbury's was resisting the trend. Too often these schemes are sales promotions where the customer's loyalty is to the scheme, not the company using it. To have any lasting effects they must establish customer relationships that go beyond collecting points that are redeemable against a gift. Such schemes are easy to follow and once everyone has one, they impose a cost with little benefit.

Gaining increased market share will improve a company's profitability automatically. Much depends on its strategy for gaining increased market share. We see many high-share companies with low profitability and many low-share companies with high profitability. The cost of buying higher market share may far exceed the returns. Higher shares tend to produce higher profits only when unit costs fall with increased market share, or when the company's premium price covers the cost of supplying higher-quality goods.

In addition, many industries contain one or a few highly profitable large firms, several profitable and more focused firms, and a large number of medium-sized firms with poorer profit performance:

The large firms ... tend to address the entire market, achieving cost advantages and high market share by realizing economies of scale. The small competitors reap high profits by focusing on some narrower segment of the business and by developing specialized approaches to production, marketing and distribution for that segment. Ironically, the medium-sized competitors ... often show the poorest profit performance. Trapped in a strategic (No Man's Land', they are too large to reap the benefits of more focused competition, yet too small to benefit from the economies of scale that their larger competitors enjoy.17

Thus it appears that profitability increases as a business gains share relative to competitors in its served markeL For example, BMW holds only a small share of the total car market, but it earns high profits because it is a high-share company in its luxury car segment. It achieved this high share in its served market because il does other things right, such as producing high quality, giving good service and holding down its costs.

Business Brains

Business Brains

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