Part 2: Sources of New Market Share
Capsule: In a fast growing market, you are better off going after the largest customers in the marketplace. But if the market is difficult, you should increase the marketing and sales resources devoted to selling to customers of weak competitors, those companies losing market share in your industry. The cost of gaining share from weak competitors will be considerably lower than the cost of beating a strong competitor.
A few years ago, we were studying how companies pursued customers in very difficult, Hostile markets, where prices were low and discounting was rampant. (See Perspectivers: “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets” and “The Commoditization of Scale.”) We interviewed a good number of companies to improve our understanding. Most of these companies were developing their marketing and sales plans to gain the sales volume of the industry’s Large and Very Large Customers. These companies paid no attention to the strength of the competitor who served the customer.
Other companies, though, followed a different approach. Many of these companies were smaller members of the supplier group. They held market shares that would rank them third or below in their industries. These companies developed their marketing and sales programs specifically to avoid strong competitors’ customers. They focused most of their efforts on the customers of the weaker competitors in the marketplace. Many of the companies that followed this approach of targeting the customers of weak competitors were successful. They gained share. So we evaluated the likelihood of a company’s gaining share, that is positive volatility, from strong competitors compared to weak competitors. We found that the weak competitors in the marketplace were four to eight times more likely to suffer negative volatility than were the stronger suppliers in the market. From that day forward, we made it a point to understand who were the weak competitors in a hostile market and why they were weak. We used that knowledge to develop marketing and sales programs and product innovation efforts accordingly.
If your market is not highly competitive as a result of aggressive pricing and thin marketing, you may skip these analyses.
Weak competitors cede market share. The Company should have to spend less marketing and sales effort in order to gain volume from a weak competitor than from a strong one. (See Perspectives: “The Rust Belt Revival” and “Overcapacity”: Threat or Opportunity?.”) Weakness is a relative term. (See Symptoms: “The industry leaders are losing share.”) It has less economic meaning in an average market than it does in a hostile market where competition is very intense. (See Perspectives: “The Lessons AT&T Holds for Industry Leaders”.)
One competitor to track in any industry is the Price Shaver. These kinds of companies offer discounts, usually 2 to 5 percent below the industry standard price, for a set of product benefits that look comparable to the most popular products in the market. In truth their products are not comparable with those of the industry leaders. Price Shavers are often smaller competitors in the marketplace who offer less convenience and reliability than do the industry leaders. In a market where the Price Shavers are gaining share, the industry leaders usually are weak players, at least temporarily. Their weakness is often due to high prices. More commonly, Price Shavers are relatively weak competitors with very limited market share potential.
In a market with average competitive intensity, where profitability levels for the industry are at or above average, few competitors are truly “weak.” Some competitors are less strong than others are, but their profitability enables them to serve most customers well. In a Hostile market, where pricing is low and competition is intense, competitor weakness carries more strategic import. In these kinds of markets, a weak competitor does not have the margins to serve customers well or chooses to cut corners on customer benefits to improve profits. Cutting corners includes decisions to leave prices high in a falling price environment or to fail to offer the levels of service and the breadth of products that are common to the rest of the industry competitors.
Where competitor strength and weakness is important to Volatility, the Company must alter its customer segmentation targets. In a market with average profitability levels, most companies choose to compete for the customers of the industry’s strongest competitors because these competitors tend to serve the industry’s largest customers. This approach relies on the Company’s ability to offer a benefitthe strong competitor is not able to offer the largest customers. If the Company cannot offer something unique, then it becomes a “weak” competitor itself. (See Perspective: “How the Auto Rental Market Became Hostile.”) In an intensely competitive market, the Company usually gains share more easily by putting increased marketing and sales efforts toward the customer of the weaker competitors. (See Symptom: “Competitors in Formerly Underdeveloped Markets Have Begun Meeting One Another.”) This strategy may imply targeting more Medium and Small Customers until the industry recovers from its hostility.
Competitor Weakness Questions
The analyses focus on the customer Size/Role segments:
- What competitors gain and lose market share in the industry? (Analysis 23)
- In what positions on the Size/Role matrix are the share losers suffering Negative Volatility?
- What benefits are enabling the share gainers to gain their share?
- What failures and shortcomings are causing the share losing competitors to cede share? (Analysis 24)
- What is the relative likelihood of the Company gaining share from a weak competitor compared to a strong competitor? An index expresses this answer well.
For example, if the likelihood of share gain from a strong competitor were 3% while the likely share gain from a weak competitor were 5%, the relative likelihood of share gain would be 5/3 = 1.67. In this example, the Company would tend to gain 2/3 more volume in competition with a weak competitor than it would competing with a strong competitor. (Analysis 25)
- Should the Company give preferential attention to the customers of some competitors over others?
- If the Company decides to give preferential sales and marketing attention to some competitors’ customers over others, how might it do that?
- How might the value proposition for the customers of the weak competitors differ from that offered to other customers?
|Summary Points||Next: Part 3: Target Segments|