Part 2: Sources of New Market Share
Industry Volatility
Capsule: Industry volatility is market share that moves from one set of suppliers to another. The company who loses the market share suffers negative volatility while the company who gains the share has positive volatility. The more competitive the market the more likely that volatility will be low rather than high and that the volatility will take place in less attractive market segments.
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If you already sell to the industry’s fastest growing customers, you are in great shape. All you have to do is keep them and you will gain share. (See Symptom: “Some customer groups are growing faster than others.”) But if you do not have more of the fastest growing customers than the average competitor in the market, or if you want to grow share faster than your customers’ growth will allow, you have to create, or take advantage of, industry market share volatility. Volatility is sales volume, measured in market share, that enters or leaves a market or changes suppliers during a period of time. The net volatility a company experiences accounts for the major shifts in market share of most companies.
This net volatility is the company’s positive volatility less its negative volatility. Positive volatility is volume that a company gains either from new customers entering the market or from customers switching purchases from other suppliers to the company. With negative volatility, the company loses volume, either because some of its customers leave the market or because the company’s customers shift their purchases away from the company to other suppliers.
The size of an industry’s net volatility usually depends on the type of a market in which the Company competes. A Developing market, where many new customers enter each year, has high net positive volatility. Most mature markets have only a slight positive volatility, as relatively few new customers enter the market. A declining market will see net negative volatility, as customers leave the market. The latter two markets, a mature market and a declining market, demand that the Company understand thoroughly volatility and the sources of market share change. (See Perspective: “Building on Customer Volatility.”)
In a mature market, the sizes of the industry’s positive and negative volatilities may be nearly the same. However, any individual company’s net volatility may be quite different than that of the industry. Companies that are losing share will often have high negative volatility. Companies who are gaining share may have high positive volatility. However, these share gaining competitors may also be gaining compared to the rest of the industry because they have lower levels of negative volatility than does the industry. In fact, some leading companies who succeeded in gaining share in several difficult industries did so solely by having less negative volatility, better rates of customer retention, than did their competitors. The more difficult the market, the more important it is to understand industry volatility.
Positive volatility is significant in high growth, Developing, markets. Positive volatility runs in excess of 15 percent of annual industry sales in a fast growing market because many new customers enter the market and new value propositions entice customers to change suppliers in order to take advantage of the “state of the art” products in the marketplace. The Company can change its market share by several points in a year when the market has high positive volatility. Few markets serve such rich fare.
In a more mature, highly competitive market, positive volatility is often quite low. (See Perspective: “Use Subtle Strategy in Tough Markets.”) In many cases of a Hostile marketplace, positive volatility is less than 5 percent of the annual sales volume in the industry. In this kind of market, a company struggles and strains to gain even a point of market share a year. (See “Distribution channels are undergoing a shakeout.”)
Such a market calls for the Company to analyze each instance of volatility by the Very Large and Large customers in the market. The Heart of the Market in an industry is the sum of the Primary and Secondary role positions with the industry’s Very Large and Large customers. These market segments drive volatility in fast growing and relatively stable markets. But, when a market enters a period of hostility, these segments become much less volatile. In fact, the average volatility in Primary and Secondary roles with Very Large customers often falls below the average volatility for the industry. Commonly, you will find that individual customer size/role segments have volatility levels quite different from that of the industry’s average volatility.
Heart of Market: Industry Examples »
The Company conducts these analyses within the size/role segment matrix. This matrix represents the major size-based segments in the industry. The analyses develop a picture of the volatility in the industry and in each segment. You express this volatility as a percentage of annual sales in the segment or industry.
You might also find it helpful to express the volatility of a segment as an index with the average industry volatility as the base of 100. This index tool enables you to see at a glance segments with high or low volatility and the extent their volatilities vary from average. Segments with high volatility offer the most opportunity for your growth. The analyses concentrate on positive, rather than negative, volatility in the market because your objective is to find sources of new sales volume for your business. You examine your negative volatility in the Diagnose Products and Services section of the web site.
Positive Volatility Index: Industry Examples »
Industry Volatility Questions
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Analysis 16: |
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Analysis 18: |
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Analysis 19: |
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What industry positive volatility results from new customers entering the market?
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What industry negative volatility occurs because current customers leave the market?
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What is the net volatility caused by customers entering and leaving the market?
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How much industry positive volatility results from customers changing suppliers, moving some or all of their volume from one group of suppliers to another? This positive volatility is the source for much of the share change that will take place in the future. (Analysis 16)
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Where on the size/role segment matrix is the industry’s positive volatility? (Analysis 18 and Analysis 19)
Basic Strategy Guide Users Return To: Step 6
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