Many organizations often embrace the common corporate taglines - "Your choice service provider"; "Leading organization"; "Premium company". One starts to wonder how true these taglines are in their ambitious claims to market share victory.
Ambitious claims aside, let us explore a few more definitive strategic benchmarks.
The Boston Consulting Group developed this particular model some 30 years ago - the Rule of 3 & 4, suggesting that in a stable competitive market, there is never more than 3 significant competitors and the largest of the 3 has no more than 4 times the market share of the smallest. The approximate equilibrium point for any 2 competitor is 2:1 ratio at which it will not become advantageous to compete for market share. Any company with less than 1/4 the share of its largest competitor will not be able to compete effectively.
Such conditions stipulates that the market share of each competitor is no less than 1/2 that of the next largest competitor, with the smallest having no less than 1/4 of the share of the largest. Obviously, in meeting the requirements, there would be no more than 3 major competitors in the game. This theory is supported by observation in industries as diverse as automobiles, baby food, and soft drinks, with significant implication to the competition.
Cost is a function of market share, in terms of experience curve and economies of scale benefits, and from a cost perspective, the logic also stands. If 2 competitors have nearly equal shares, the one that increases relative share gains a cost advantage. However, as the share difference widens, the opportunity diminishes as a price reduction costs more and the potential gain is less. This limit is approximately 2:1 in terms of market share.
The limiting share ratio of 4:1 is also an approximate. At this ratio, the probable cost differential produces very large profits for the leader, while the low share competitor breaks even. This differential should be enough to discourage either competitor from further significant investment to gain share. Barring exceptions, the Rule of 3&4 seems to be a good predictor of the results of effective competition.
In applying The Rule of 3&4, it depends on an accurate definition of the relevant market, requiring years to reach equilibrium, unless the leader chooses to hold market share in high-growth phase of the product life.
If the Rule of 3&4 is inexorable, the rule of thumb (no pun intended) says: if you cannot be a leader in a market sector, cash out as soon as practical. Reinvest in products and markets where you can be a successful leader.
Always remember the timeless maxim - Never fall in love with your business.
Joey Jones is a business management consultant with 17 years of business and marketing experience, both online and offline. VISIT Small Business Marketing Strategies for business and marketing proven and tested strategies, marketing plans and internet marketing that works. Head over to BusinessFast4ward.com NOW for one stop information.
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