Our obsession – Market leadership
Businesses all over the world are obsessed with achieving market leadership, building scale to achieve economies of scale and last but not the least, consistently clocking high growth rate. However, the obsession of businesses with the above objectives invariably lands them in trouble. Why? Primarily because they have not only misunderstood the concepts behind these objectives but also how these objectives should be achieved. As such, I feel that there is a strong need to clarify what our obsessions mean so that we can avoid the pitfalls and run our businesses successfully. I will discuss each of the obsessions one by one. First, let us deal with our obsession of achieving market leadership.
It seems that everybody in the business world is convinced with the idea that the only way to make money is to become number one in one’s industry. Maybe, they have read what Jack Welch, the high profile CEO of General Electric (GE), had said or have read somewhere that high market share results in lower cost because of economies of scale which in turn result in higher profits and a higher rate of return. In an interview in Economic Times (7/3/2008), Aditya Birla stated his criteria for his group to be involved in an industry. He said that his group will participate in an industry only if they have number 1, 2 or 3 position in the industry otherwise they will exit that industry.
However, I feel that this idea needs a little clarification. First, the link between number 1, 2 and 3 market position and high profitability was established by PIMS database. However, PIMS database referred to high market share in the “served market” and not the whole market or industry. The key word is the “served market” which is usually not mentioned whenever we talk about the link between the market position and high profitability. This could be misleading. I am sure that Aditya Birla meant number 1, 2 or 3 market position in the served market and not that of the industry as a whole but I thought it would help if I can clarify the issue. Second, the link between high market share and profitability does not mean “high market share” at any cost. For the high correlation between the two to work, high market share has to be earned and not bought as quite a few companies think and end up in trouble.
Served market is defined as that part of the total market which a company decides to target, that is, the target market. For example, if you are a manufacturer of red widgets, the total market will be the combined market for all colors of widgets that is green, blue and red. But the served market for the company will be that portion of the total market that is for Red Widgets. So, there could be companies with different served markets within the same industry. For instance, a company could be either serving the Red Widgets market or the Green Widgets market or the combined market of Blue, Red and Green Widgets and so on.
Taking the concept of positioning proposed by Al Reis and Jack Trout into consideration, it is obvious that there can be and there are a number of positionings available in an industry which a business can adopt for its products and services. This means that there could be a number of served markets available in an industry and that each served market could have companies at no. 1, 2 and 3 market positions. This implies that there could be a number of players with a leadership position in the same industry, that is, each leader serving a different served market which is part of the total market. This further suggests that there could be a number of profitable players with leadership position in a specific industry with their own served market.
Let me explain this with the example of the radio broadcast industry in India which has more than 140 players. There are some famous and large radio stations like Radio Mirchi, Radio City, Red FM, Fever104, Big FM and so on. On the other hand, there are niche players like MEOW which has a unique positioning of “radio station for women.” I think Radio Mirchi is the largest and is probably considered as the leader in the radio broadcast industry as a whole. Now is Aditya Birla saying that he will only be involved in the radio industry if he is either in the league of Radio Mirchi, Big FM, Fever104 or Red FM and not Radio MEOW? Or is he saying that he can also be a Radio MEOW because it is in a leadership position in its own served market?
I believe the strategy should be to participate in an industry in which you have a distinct or unique positioning and exit those in which you don’t. A distinct and unique positioning implies a market leadership position. The best example to explain what I mean is that of Rolls Royce. It sells just about 2000 cars but most probably has a market valuation higher than some of the automobile manufacturers which not only have higher market share but also sell a lot more cars than Rolls Royce.
In addition, there have been instances where a company has taken the link between high market share and profitability to mean “high market share” at any cost. I think it was Yamaha motorcycles that tried to increase its market share at any cost (quite some time back) and landed up into trouble. One can increase the market share very easily through expensive acquisitions or expensive marketing campaigns but that is not the foundation of the high correlation between high market share and high profitability. When we talk about high market share in this context, we mean achieving high market share through high quality of products and services, high level of customer satisfaction and retention and sustainable business policies and strategies.
So, I hope Aditya Birla was talking in terms of the served market and that when you think of market leadership, you will also think in terms of the served market. Also, I hope you will aim to earn market leadership by implementing the right actions and not buy it with the help of expensive acquisitions and marketing campaigns.
I remember way back in 1979-80, while working with Escorts, I was able to achieve market leadership for Escorts tractors in Bihar within a short time by taking right actions and not through some innovative sales scheme. You will be surprised to know that achieving market leadership was not even our objective. Actually, we had not even thought about it. We were just focused on doing the best we can by taking the correct actions to develop the market for Escorts tractors. We just took the right actions and hoped for the best results. The final result was even a surprise for us.
So I suggest that we stop worrying being a market leader. Achieving market leadership will be automatic if we just focus on taking the right decisions to develop our business at a steady pace.
Avinash Narula
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