Running a business with a high market share is profitable, points out various studies. Why is that so?
There could possibly be three explanations for it:
Economies of scale
A company with a 30% market share operates at twice the scale as that of one with 15% market share. So, the former is more likely to bring in operational efficiencies within a type of production technology.
Also, large size and leadership in the business permits them to bargain effectively or get higher prices for their product than its competitors.
Being a market leader also gives them the ability to attract the best of talent that in turn maximizes productivity for the organization.
High market share does give a solid foundation to your business.
What type of market share should you aim for? Especially in these times, when inflation has hit a high and there are concerns regarding global economic slowdown. Should you focus on the value share or rev up the volumes?
What market-share goals are desirable depends on a lot of factors including the competitor’s strength, capital available to support a strategy and the willingness of the management to forego present earnings for future results.
Here are the steps to make the right choice:
Product life cycle stage
India is a promising market for many products – thanks to its favourable demographics. Some product categories have already seen a lot of penetration while others have not. Find out at what stage your product is in. If it is in the nascent stage, you may play the volume game. Once the penetration increases and customers start showing loyalty towards products and brands, you can move up the value curve.
With inflation looming over, customers worldwide are axing their luxury budgets. Ensure your products give the necessary value proposition to customers.
Is cost efficiency your biggest strength? Then, it might make sense to reduce prices and focus on volumes. While lower pricing reduces margins, overall cost efficiencies also make up for it by using idle capacities.
Further, if product differentiation, customer intimacy or product innovation is your greatest strength, you might someday want to graduate towards value-additive products that not only boost market share in value but also have the opportunity to improve short-term earnings and cash flows.
One can also adopt a balanced approach by playing value or volume strategies for different segments of the market. Or perhaps play the volume game in each product segment in order to capture overall market share in terms of value.
Assessing competitor position
Any business strategy analyzes a competitor’s position thoroughly. What are their market shares (volume and value), their competitive strength and weaknesses, financial position and so on?
The level of analysis has to be deep and specific. For instance, an industry-wise study might show that as the market share of companies’ increases, the purchase to sales ratio falls. What explains this relationship?
One possibility is that as the company gains higher market share, they are getting vertically integrated, resulting in lower purchases to sales ratio. If that’s the case, then they are possibly ‘making’ more than buying (from outsiders) which should reflect the rise in manufacturing costs.
Perhaps it is possible that despite the vertical integration, manufacturing costs are getting offset by increasing efficiency (economies of scale).
You need to lay threadbare the unit economics concerning your business by leveraging on competitor’s financial and business data. Many cloud-based databases are providing this information at the click of a button.
Similarly, you can analyze industry data on marketing and advertising expenses and R&D to set your internal budgets. Many businesses today have an internal strategy team that scouts for acquisition opportunities based on ongoing financial data and valuations.
Market-share goals depend on a lot of factors including the competitor’s strength, resources available and the willingness to forego present earnings for future results. Use data to stay ahead of the curve.
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