MARKET SHARE

Application: Marketing Strategy, NPD Direction, Sales Strategy, Communications Strategy

The Concept

This is one of the most straightforward and simple of concepts. The idea is that marketers measure the percentage of sales in any one market that their product or service takes. By understanding the share that their company has, compared to other competitors, they can adjust their strategy and marketing programmes. For instance, the company with the dominant share, the market leader, has significant advantage. It is thought that large market shares allow economies of scale, cash generation powers, re-investment opportunities, and the chance to dominate a market.

History, Context, Criticism, and Development

Whilst it is possible to find references to “increasing your share of consumption” in early marketing text books (see Butler, R.S., 1917), the emphasis on market share dominance seemed to come to the fore in the mid 20th century. Bruce Henderson, for instance, was a very influential strategy advisor (see the entry under Boston Matrix) and reoriented his thinking to argue that share was an important determinate of profit. He suggested that high share gave large economies of scale which allowed companies to reinvest and grow.

A particularly influential support to the argument in favour of market share dominance was the PIMS (Profit Impact on Market Share) research project. This was a long-term study which was set up as a collaborative research project (by the American Marketing Science Institute and the Harvard Business School) in 1974. In the first few years of operation it comprised about fifty-seven American companies with over 600 participating individuals. (It has since grown to become a broad international programme.) Each was asked to provide data in a strictly defined, comparable format. The first major finding of the survey was a link between explicit strategic planning and profit performance. However, within three years the leaders of the study were reporting a link between market share and profitability. They demonstrated that, in several sectors, dominant players were more profitable than smaller share operations. They suggested that the reasons for this included: economies of scale, market power, and quality of management. They made an explicit link between market share and return on investment. Based on the data, they observed the cost of several marketing strategies related to share and recommended that companies distinguish between: building strategies, holding strategies, and harvesting strategies. They were convinced that there was a level of market share in each market below which participation was not viable and companies withdrew. They also observed remarkable stability. Of the 600 business units that were then in the study only a fifth grew share by two points or more in the previous years. They observed that real share gains were made in all instances by new entrants in new markets, leading to the “first mover advantage” belief amongst many business leaders.

Voices and Further Reading

• Buzzell, R.D, Bradley, T.G., and Sultan, R.G.M., “Market share – a key to profitability”. Harvard Business Review, January–February 1975. (This was a report on the fourth year of the PIMS project. By then the project has fifty-seven companies in its ongoing survey. The authors report a strong co-relation between high market share and profitability.)
• Buzzell R.D. and Gale, B.T., The PIMS Principle. The Free Press, 1987.
• “The primary reason for the market share-profitability linkage, apart from the connection with relative quality, is that large-share businesses benefit from scale economies. They simply have lower per unit costs than their smaller competitors. These cost advantages are typically much smaller than those once claimed by over-enthusiastic proponents of ‘experience curve pricing strategies’ but they are nevertheless substantial and are directly reflected in higher profit margins.” Buzzell and Gale, ibid.
• “Most business people already understand that there is a direct relationship between relatively high share of any market and high returns on investment. Clearly, however … it is important to be most careful about how ‘market’ is defined.” McDonald, M.H.B. and Wilson, H., 2011 (7th edn).
• “Market share is very valuable. It leads to lower relative cost and therefore higher profits. Unfortunately, most efforts to improve share depress profits, at least short term. There are two principal reasons for a shift in market share between competitors. The most common is lack of capacity. The other reason is a willingness to lose share to maintain price.” Bruce Henderson in The Boston Consulting Group on Strategy. Wiley, 2006.
• “A company following the market-share leadership strategy tries to reap above-average profitability by becoming one of the few companies remaining in a declining industry. Once a company attains this position, depending on the subsequent pattern of industry sales, it usually switches to holding position or controlled harvest strategy. The underlying premise is that by achieving leadership the company can be more profitable (taking the investment into account) because it can exert more control over the process of decline and avoid destabilising price competition.” Porter, M.E., 1995.

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