Such companies as Xerox, zenith, control Data, and Polaroid made their mark because they found a better product. At the same time, innovation is an expensive and risk-laden strategy requiring a careful analysis of market needs and preferences, a large investment, and astute timing. Market segmentation may also be used to build share. Many dominant companies concentrate on the mass market and neglect or undersatisfy various fringe markets. This mistake is illustrated by the big three american auto makers, who for years sought the majority market, concluding that the small-car market segment was too small to be profitable. The vacuum they created was first filled by volkswagen and then later by other European and Japanese auto companies at a high profit. A third strategy for building market share is distribution innovation. In this instance, the company finds a way to cover a market more effectively.
Marketing management philip kotler latest edition
If a lower level of risk does not compensate for the reduced profitability (which may or may not exist, since prices may be higher or marketing costs lower and profitability unchanged) and for transitional costs, then the specified lower market share is not optimal. If the company uses this technique for a number of alternative market-share levels and cannot find one that offers a more satisfying balance of profitability and risk, then it is at its optimal level. Market-Share management Strategies Thus far, we have shown how a high market-share company can locate its optimal market share. We shall now discuss the various strategies a company can use either to attain or maintain this optimal share or to shift it to a higher level. Market-share management strategies fall into four broad categories: (1) share building, (2) share maintenance, (3) share reduction, and (4) risk reduction. Share building The majority of companies that analyze their market position conclude that they are operating below their optimal market share. They are not exploiting their plant fully or have not been able to build a plant at the most economical size; they are not quite large enough to achieve promotional and/or distributional economies; and they cannot attract the strongest talent. In sum, they see a higher market share as promising greater profitability without commensurately greater risk—indeed, often as reducing that risk. Share-building strategies must be designed to meet several considerations—whether (1) the primary market is growing, stable, or declining, support (2) the product is homogeneous or highly differentiable, (3) the companys resources are high or low in relation to its competitors resources, and (4) there are one. The most effective strategy for market-share gain is product innovation. Its weak sister, product imitation, may be appropriate for growth in a growing market, but it will probably not alter existing market shares.
Starting with shredder its current share, management can analyze:. The expected cost of achieving a specified higher level of market share. The expected profitability associated with that market share. The expected increase in risk. The increase in long-run profitability must compensate for the cost of achieving the higher share and the higher attendant risk. If not, the specified higher market share is not optimal. Management should also examine a specified lower share level, taking into consideration the cost, profitability, and decrease in risk at each level.
Companies seeking to enlarge their share of market may have to carry extra costs of legal work, public relations, and lobbying to defend their larger market share against criticism and regulation. When these factors begin to offset further gains in production and distribution efficiency, the optimal market share has been reached. Estimating professional risk, at different levels of market share, a companys risk also changes. Risk is high for low market-share companies, declines as market share increases, and then increases again at very high share levels. Risk is high at low market-share levels because a business is subject to competitive forays by stronger competitors, cannot afford adequate marketing research and promotional spending, and is vulnerable to sudden changes in consumer tastes or spending. Risk starts to fall with increased market share because an organization can engage in more market research, operate better information systems, recruit more experienced marketing personnel, and spend more on marketing. Risk reaches a low point at a high share level and then may begin to increase at higher levels because of the growing probability that the government, consumers, and competitors will single the business out for specific attack. Finding the optimal level, this third step calls for top management to compare the changes in profitability and risk that it expects in seeking other levels of market share.
Empirical studies bear this out. One of the best and most recent is the marketing Science Institutes Profit Impact of Market Strategies (pims) project. This study found that: The average roi for businesses with under 10 market share was about 9 On the average, a difference of 10 percentage points in market share is accompanied by a difference of about 5 points in pre-tax roi.4. The pims study shows that businesses with market shares above 40 earn an average roi of 30, or three times that of those with shares under. However, the pims study does not reveal whether profitability eventually turns down at very high market-share levels. The study lumps together all market shares above 40; therefore, the behavior of roi in response to still higher market shares is undisclosed. Consequently, a high market-share company must itself analyze whether profitability will fall with further gains in market share. For the following reasons, it could drop dramatically: Holdout customers may be loyal to competitors, so the cost of attracting them might exceed their value as new customers. The needs of these customers may be unique and not worth the cost of catering.
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Estimating profitability as a function of market share. Both economic theory and empirical evidence suggest that advertisement profitability increases with market share. Consider the case of a company with a fixed plant size. In this case, its sales volume breakeven point is determined by the slopes of the cost and revenue curves. Beyond the breakeven point, the companys profits increase with its sales volume. This may continue until output levels reach a high percentage of capacity and thereby cause direct costs to increase dramatically. Now consider the company that can expand its plant and market size.
Usually this permits economies of scale in production, distribution, and marketing. A larger company can afford better equipment or more automation that lowers unit costs. It can obtain volume discounts in media advertising, purchasing, warehousing, and freight. It can attract the more lucrative customer accounts that want fuller services. And it can gain distributor acceptance and cooperation at a lower cost.
For example, risk from competitors is not very great if they cannot afford to mount counteradvertising campaigns or private antitrust suits. The risk of consumer and government intervention is not very great if the social milieu has changed from one of widespread business criticism to one of more traditional acceptance of business practices. Unfortunately, there has been little discussion of either the problems of market-share management facing the high market-share company or of the actions it should consider. Much has been written about how a company should go about attaining increases in its market share, but little about what it should do once it has attained a large share. That is the question we shall consider here, but first we shall discuss the way in which a business decides on its optimal market share. Determining an Optimal Market Share, most companies think and plan not only in terms of profit and sales volume but also in terms of market share.
They see market-share gains as the key to long-run profitability. The boston Consulting Group, for example, has proposed that, in product areas characterized by a strong learning curve, companies pursue market share maximization instead of current profit maximization.3, despite this recommendation, we feel that an organizations goal should not be to maximize market share, but. A company has attained its optimal market share in a given product/market when a departure in either direction from the share would alter the companys long-run profitability or risk (or both) in an unsatisfactory way. A company finding its current share below the optimal level should plan for market-share gains; a company that is at its optimal market share should fight to maintain it; and a company that has exceeded it should seek to reduce its current share. How can a company determine where its optimal market share lies? It must go through the following three-step procedure:. Estimate the relationship between market share and profitability. Estimate the amount of risk associated with each share level. Determine the point at which an increase in market share can no longer be expected to bring enough profit to compensate for the added risks to which the company would expose itself.
Kotler, marketing 8th Edition, pdf
In any case, they are all involved in expensive legal battles, and they all face the prospect of being broken up or required to drastically alter their ways of doing business. More high market-share companies can expect antitrust suits when the ftc begins to exercise its newly won authority to require line-of-business reporting from major corporations. With such attention focused on their daily operations, multiproduct companies will find it harder to disguise their dominance of a particular market, although they may be able to disguise its profitability through arbitrary allocations of fixed overhead. Congressional pressure to fight inflation through stepped-up enforcement of the existing antitrust laws will also cause severe headaches for many high market-share companies. There are, however, two qualifications to these risks:. The degree of risk depends on how the company has obtained its high market share. To the extent that its success is based on continuous innovation and/or lowering of costs and prices to buyers, consumers and the government may feel book less hostile to the company, and competitors may feel less able to attack. To the extent that its success is based on using an expiring patent, on bundling services, or on tying up a particular channel of distribution, these parties may be more inclined to attack. The degree of risk depends on the resources of the other parties.
Campaign gm—the proxy battle to force general Motors to take a number of actions believed to be in the public interest—was conducted against the largest and most visible auto manufacturer. Similarly, soup—students Opposed to Unfair Practices—was originally formed to fight the use of alleged deceptive practices in the advertising of Campbell soup, the leader in the soup industry. Eastman Kodak, first National City bank of New York, and dupont are three other dominant market-share companies that have been singled out by consumer or public-interest organizations. Such attack by a consumer group can, of course, create ill will for the organization, as well as involve it in costly litigation. The high market-share company also has to cope with antitrust initiatives taken by the government. The justice department and the federal Trade commission are placing a renewed emphasis on the structural characteristics of markets. Rather than wait for conclusive evidence that the conduct within an industry has been anticompetitive (that is, predatory or collusive these agencies have taken action primarily because noncompetitive market structures have allegedly existed. Recent suits have been filed bags against ibm, xerox, the eight major oil companies, the four major cereal manufacturers, and realemon; in all of these suits the government has emphasized that these companies market shares are so large that their competition has virtually disappeared. One might say that these companies are now being penalized for their success.
attempt to demonstrate that the larger competitor has violated antitrust laws while amassing its dominant share. In one of these suits, a court recently ordered ibm to pay telex 259.5 million (this was later reversed by an appeals court). Eastman Kodak, xerox, Anheuser-Busch, gillette, and General foods are currently involved in other private antitrust actions.2 Another type of attack involves the use of comparative advertising. Goodrich, seven-Up, and others have found it profitable to mention or picture the products of their large competitors in their ads, and then to suggest the superiority of their own products. Potential competitors also present problems because they may see the company with the largest share as the only competitor stopping them from capturing a portion of the profits being earned in a particular industry. Clearly, some large multiproduct companies have had considerable success in entering lucrative markets previously dominated by one or a few organizations. Procter gamble, for example, has recently entered several markets (potato chips, tampons, deodorant sprays, and toilet paper) with noteworthy results. Yet another risk is posed by consumer or public-interest organizations. A larger market share usually means greater public visibility; consumer groups may choose the more visible companies as the targets of their complaints, demonstrations, and lawsuits.
Companies possessing it are tempting targets for actual and potential competitors, consumer organizations, and government agencies. Ibm, gillette, eastman fuller Kodak, procter gamble, xerox, general Motors, campbells, coca-cola, kellogg, and Caterpillar are cases in point. Their market shares have been their blessing and their curse—their curse because they must make their decisions and manage their operations with much more care than do their competitors. These companies cannot aggressively seek larger shares because further gains may break the dam and let the waters of antitrust action pour. In some cases, these companies may even have to give up some share in order to stem the tide. The company that acquires a very high market share exposes itself to a number of risks that its smaller competitors do not encounter. Competitors, consumers, and governmental authorities are more likely to take certain actions against high-share companies than against small-share ones.
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In recent years, a growing number of business practitioners and theorists have postulated that one way for a company to increase its return is by increasing its market parts share, and studies appear to have confirmed this relationship. But the authors of this article refuse to accept the blanket inference that more is necessarily always going to mean better. A large market share, they point out, can spell more trouble as well as more profit for a company; a given project promising higher returns than others will surely entail greater risks as well. Given this direct link between profit and risk, it behooves companies to manage their market shares with the same diligence as they would manage any other facet of their businesses. This concept of managing market shares leads to some intriguing possibilities. Although most companies can profit by attempting to increase their market shares, some may conclude that they are at (or possibly beyond) the point at which expected costs and risks outweigh expected gains. The authors suggest various strategies that these companies might consider in attempting to manage their market shares. Capturing a dominant share of a market is likely to mean enjoying the highest profits of any of the companies serving that market.1 It can also mean winning the leadership, power, and glory that go with such dominance. But high market share can also mean headaches.