Part 2: Sources of New Market Share

A Comparison of the Concepts of Volatility and Sales Growth

Capsule: Volatility and Sales Growth are important strategic concepts. They differ from one another and co-exist in most markets and companies. Neither depends on the other, though both change market share for a company.



This comparison seeks to clarify each concept. It is divided into several sections:

At the end of this comparison is a series of self tests on Sales Growth and Volatility. The tests present you with a Beginning Period and an End Period and ask you to suggest changes to customer and company results that would produce the requested combination of Sales Growth and Volatility. We provide one answer to each test for reference.

Throughout the comparison, to illustrate the concepts of Volatility and Sales Growth, we use a a consistent set of tables based upon a hypothetical example that we call the
Base Case. The tables show the Beginning of Period, End of Period and a Summary of Changes During the Period. The Beginning of Period remains the same in every example. What changes is the End of Period state.

Explanation of Base Case and its Tables

EXPLANATION OF VOLATILITY AND SALES GROWTH

Volatility and Sales Growth are separable concepts. Neither depends on the other, though both change market share for a company. They usually exist side-by-side in a market and in a company.

  • Volatility: Volatility occurs when customers change their suppliers, including when customers enter or leave the market.

Example 1: Volatility

  • Sales Growth: A market's sales grow when there is a net increase in total units sold by all suppliers to the total of all customers. This produces positive Sales Growth. A net decrease in total units sold to the total of all customers produces negative Sales Growth in the market.

Example 2: Sales Growth

Growth may occur without Volatility and Volatility may occur without Sales Growth. In Example #1, Volatility occurred without Sales Growth. In Example #2, Sales Growth occurred without Volatility.

It is useful to separate Sales Growth from Volatility because a company uses different strategic tactics to address issues of Sales Growth and Volatility. A company addresses Sales Growth by changing its mix of Core customer volume, to increase the number of Core customers with high growth rates. It seeks to grow sales faster by changing its customer targets.

On the other hand, to change its Volatility results, a company seeks first to reduce its Negative Volatility and then to produce Positive Volatility. It changes its Volatility results by improving its value proposition, through changes in its product and service package or in its pricing policies.

RULES TO IDENTIFY VOLATILITY

The overall rule to determine that Volatility has occurred in a market is as follows:

At least one customer must change the

percentage allocation of its purchases.

This rule encompasses a customer entering the market, where the customer allocates purchases to new suppliers, and to a customer leaving the market, where the customer removes purchases from its suppliers.

You can examine Volatility in a customer, in a company and in the market:

For Volatility in an individual customer, you must have:

For company Volatility, you must have:

Example #3: Company Volatility

The Market's Volatility is the sum of all customer Volatility:

Example #4: Market Volatility

For the market to show Net Volatility you must have either:

THE EFFECT OF SALES GROWTH AND VOLATILITY ON COMPANY MARKET SHARE

A company may see a change in its market share due both to changes in Sales Growth with its existing customers and to Volatility.

The company's market share changes due to Sales Growth, or changes in existing customer purchases, when:

  • The company's existing customers grow faster than their peers and purchase units from the company at a rate greater than the average growth rate in the industry. The company's market share then grows due to the growth of its customers' purchases.

  • The company's existing customers grow slower than their peers and purchase units from the company at a rate lower than the average growth rate in the industry. The company's market share then shrinks due to the relative shrinkage of its customers' purchases.

The company's market share changes due to changes in customer Volatility when:

SELF TEST ON SALES GROWTH AND VOLATILITY

In the following tests, you will suggest changes to the Base Case table below in order to produce a change in the marketplace or company performance that is requested in the test. To illustrate an answer, we will suggest changes that meet these conditions; however, your answers may differ from ours.


Beginning of Period

Customers in Market

Amt Purch from all Suppliers

Primary Supplier

Primary Supplier % of Cust Purch

Units of Sale by Primary Supp

Secondary Supplier

Secondary Supp % of Cust Purch

Units of Sale by Secondary Supp

Customer A

1500

Supplier 1

60%

900

Supplier 2

40%

600

Customer B

1200

Supplier 1

80%

960

Supplier 2

20%

240

Customer C

1000

Supplier 2

50%

500

Supplier 3

50%

500

Customer D

0

None

0%

0

None

0%

0

Total

3700

2360

1340

Suppliers in Market

Amount
Sold

% Total Market Share

Supplier 1

1860

50.3%

Supplier 2

1340

36.2%

Supplier 3

500

13.5%

Total

3700

100.0%

Suggest a change or changes to the Base Case table above that would have the following effect on the
market as a whole:

In the next set of tests, we will examine changes
within one company, Supplier 1. Suggest changes in Supplier 1's arrangement with its customers that would produce the requested results for Sales Growth and company Volatility:

Basic Strategy Guide Users Return to: Step 6



Summary Points

Next: Win vs. Failure