Market share – is it worth the grief?
Companies like – and need – economies of scale. The more work, the more product sold, the lower the production costs and hopefully more profits. Or at least, more profits on the items sold due to the lower costs of producing them. But here’s the rub: when sales volume declines, what options are you left with? Usually, raising the price. Then, as prices rise, sales shrink further. What’s the answer?
The biggest difficulty facing most companies is its competitive environment. Are you a niche player or do you sell volume? Is your product distinguishable from other companies or is it much a of muchness? Porter defines three key generic strategies, cost leadership, differentiation, and focus. You can run your business by driving costs down, by differentiating your product range or by focusing on a niche and either differentiating or driving costs down.
In a cost leadership position, the emphasis is on finding the lowest cost at all times to maintain profits and preserve market share by sustaining a competitive price position. For larger businesses, offering perhaps more generic products, this can be a highly effective way of doing business.
However, for the smaller business, caught in a tough market, this is an extremely stressful business process because it relies on constant bargaining while having limited bargaining power. The stresses inside smaller businesses in this environment have to be seen to be believed.
A focus position may well suit the smaller business better. It has fewer resources so needs to maximise them to deliver profit. The downside to this approach for the smaller business is that other, larger competitors can come in and take that business away. UK shipbuilder Vosper Thornycroft recently moved out of shipbuilding to concentrate on defence services as its focus market. Within months of this move it was swallowed up by Babcock International, a much bigger firm operating in this sector.
Differentiation is again more suited to smaller businesses unable to generate market share leverage. Differentiation is difficult to achieve and certainly production and marketing play a significant part. Think differentiation, think Morgan cars, Rolls-Royce, Norton Motorcycles. These products may be niche, or they may offer superior features but either way they can leverage price and profitability without the need for volume.
Ford Motor Company’s recent foray into the differentiated market led to disaster when having acquired a clutch of differentiated brands (Land Rover, Jaguar, Volvo, AC etc) it had to sell them again. It could not apply mass market methodology to differentiated brands; the brands themselves suffered and Ford itself was brought close to ruin. Today, Ford has returned to being a volume brand based on cost leadership.
But what defines the competitive strategy? Some companies have a perfect monopoly – increasingly rare these days – but some companies exist in areas of monopolistic competition (for example the big supermarkets in the UK) where profit is leveraged by mass differentiation (e.g. the Tesco so-called “finest” range) or via superior cost leadership methodology. This could almost be defined as a position of corporate oligopoly, where a few players dominate the market and have enormous influence over the supply chain and, therefore, control of price.
For most companies, however, the competitive arena is a mixed one: trying to carve a share but without signficant differentiation to enable them to be effective. In such an environment, the need for effective positioning and product management has never been more clear.
If your company doesn’t have the financial clout to deliver cost leadership then it needs efficient focus and differentiation capability. It is not good enough simply to have focus or to differentiate. Such approaches need consistent, strategic involvement from the top down. You cannot price, and profit, from a bogus business position – buyer behaviour is such that people can spot a fraud a mile off.
Price, remember, is the economic sacrifice made by a person in order to achieve value in excess of that sacrifice. Price enables the buyer to receive product enjoyment or utility as the profit of their transaction. Product or service joy needs, therefore, to be significantly more valuable than the pounds surrendered to achieve that goal.
It is the company’s role to create products which have a value which is easy to understand by the customer. If you cannot create a compelling reason to buy at a high price, you need to position your product in the mass market and take the consequences. If you can create compelling reasons to buy at a high price then you need to communicate the value via packaging, marketing, advertising and of course product or service delivery.
Neither option is easy.But a simple focus and understanding of your customers will always help you find the answer.