In this blog, I have already covered strategies for businesses targeting a specific market niche. I thought it would be worthwhile looking through the other end of the telescope and examining likely strategic choices for market leaders.
So what is an appropriate definition of a market leader? Is it all to do with scale?
Well, many market leading firms are big companies, but that situation is not always the determinant of a market leader.
A better definition of a market leader is typically the firm with the largest market share. Through its pricing; advertising intensity and share of voice; and its rate of new product introduction, a leader dominates the marketplace. The market leader becomes the benchmark for the industry.
So it is perfectly possible for a small or medium-sized firm to be a market leader. As one wise owl once said, “There is no such thig as a small business; only businesses which haven’t got big yet”.
Market leadership is not determined by a company’s size. This is particularly true in fields such as cutting edge new technologies.
Market leadership is a measure of an organisation’s ability to determine the nature and bases of competition within a particular market.
Market leadership is also a question of definition. Bot Aston Martin and Fiat make motor vehicles; but is Aston Martin in the same market as Fiat. The latter makes mass market family cars. The former makes luxury sports cars. Are those the same market?
So what are the primary strategies for a market leader?
- How best to expand the total market
- How best to defend the existing market share
- How best to increase market share.
Market leaders will generally gain most by expanding their market. For example, in the 1960s and 1970s Honda looked to expand the market for motorcycles to consumers not normally associated with bikes such as women and commuters.
Another way to expand the market is to find new uses for existing products. A fine example is Goretex; a product normally associated with waterproof clothing but now being applied to Elixir guitar strings to make them last longer and remain ‘bright’.
To increase market size you can try to increase usage of products. Hence bottles of shampoo suggest two applications rather than one and chocolate biscuits are sold in packs of five or six; meaning the average family needs to buy two packets rather than one.
Predominantly being a market leader is a defensive position. Leaders are the target for others to attack. To remain in the lead you must repel those attacks and stop market share leakage.
That means the creation of fighter brands to stop competitors undercutting your primary product range. It means horizontal and vertical integration to deny competitors resources.
The large coffee shop chains have been accused of pushing out independent competitors by opening multiple stores in the same area. Who would buy from an independent where there are three stores of a well-known brand within walking distance of each other?
Think of the cereal or washing detergent aisles in supermarkets. You will find multiple product options from market leaders which denies market followers shelf space and eye-level product locations.
Market leaders need to set the pace of the market e.g. through product innovation and new product launches.
Being a market leader costs. It is rare for a market leader to be the most profitable firm in the market (although turnover may be higher than that of competitors). Profit margins are often lower because of additional spending needed to fund defensive strategies.
So market leaders will try to minimise profit margin losses through efficiency and cost minimisation programmes. This could mean just in time stock control and distribution channel efficiency.
To expand market share several possible strategies are possible.
A market leader can expand its share through the heavy rotation of advertising to increase share of voice. A leader can improve and expand its distribution channels or introduce price incentives to increase sales. Mergers, takeovers and exclusive distribution deals can also be used to expand market share.
Market leaders need proactive strategies; they cannot be passive in the market. Over the longer-term, the most important factors affecting a market leaders performance will be the quality of its products or services relative to those offered by competitors.
A leader’s market share and its profitability is strongly related to:
- Return on investment matching market share increases
- Above average rates of investor turnover (i.e. there is a thriving market in the organisation’s shares); and,
- There is a lower ratio of marketing expenses to sales revenue i.e. there are marketing economies of scale.
Market leaders often experience high investment activity which is a drag on profitability. This commitment to project investment intensity means it is harder to sustain growth of the firm.
Often the analysis of market leaders product portfolio shows profits are generated through ‘cash dogs’ and ‘wildcat’ products not from cash cows (where cash generated need to be reinvested to support new product innovations).
Being a market leader should be the aim of all businesses. In the game of commerce, that is the goal. However, some firms can be happy being in a ‘strong second position’. Being a strong second means profits can be generated but the costs associated with market leadership can be avoided.