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Market dominance strategies

From Academic Kids

Market dominance strategies are a type of marketing strategy that classifies firms based on their market share or dominance of an industry.

Contents

What is market dominance?

Market dominance is a measure of the strength of a brand, product, service, or firm, relative to competitive offerings. There is often a geographic element to the competitive landscape. In defining market dominance, you must see to what extent a product, brand, or firm controls a product category in a given geographic area.

There are several ways of calculating market dominance. The most direct is market share. This is the percentage of the total market serviced by a firm or brand. A declining scale of market shares is common in most industries: that is, if the industry leader has say 50% share, the next largest might have 25% share, the next 12% share, the next 6% share, and all remaining firms combined might have 6% share.

Market share is not a perfect proxy of market dominance. We must take into account the influences of customers, suppliers, competitors in related industries, and government regulations. Although there are no hard and fast rules governing the relationship between market share and market dominance, the following are general criteria:

  • A company, brand, product, or service that has a combined market share exceeding 60% most probably has market power and market dominance.
  • A market share of over 35% but less than 60%, held by one brand, product or service, is an indicator of market strength but not necessarily dominance.
  • A market share of less than 35%, held by one brand, product or service, is not an indicator of strength or dominance and will not raise anti-combines concerns of government regulators.

Market shares within an industry might not exhibit a declining scale. There could be only two firms in a duopolistic market, each with 50% share; or there could be three firms in the industry each with 33% share; or 100 firms each with 1% share. The concentration ratio of an industry is used as an indicator of the relative size of leading firms in relation to the industry as a whole. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the combined market share of the four largest firms, as a percentage, in the total industry. The higher the concentration ratio, the greater the market power of the leading firms.

Alternatively, there is the Herfindahl index. It is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. It is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 to 10,000, moving from a very large amount of very small firms to a single monopolistic producer. Decreases in the Herfindahl index generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite.

Market dominance strategies

These calculations of market dominance yield quantitative metrics, but most business strategists categorize market dominance strategies in qualitative terms. Typically there are four types of market dominance strategies that a marketer will consider: There are market leader, market challenger, market follower, and market nicher.

Market leader

The market leader is dominant in its industry. It has substantial market share and often extensive distribution arrangements with retailers. It typically is the industry leader in developing innovative new business models and new products (although not always). It tends to be on the cutting edge of new technologies and new production processes. It sometimes has some market power in determining either price or output. Of the four dominance strategies, it has the most flexibility in crafting strategy. There are few options not open to it. However it is in a very visible position and can be the target of competitive threats and government anti-combines actions.

Research in experience curve effects and the PIMs study during the 1970s concluded that market leadership was the most profitable strategy in most industries. It was claimed that if you cannot get enough market share to be a major player, you should get out of that business and concentrate your resources where you can take advantage of experience curve effects and economies of scale, and thereby gain dominant market share. Today we recognize that other less dominant strategies can also be effective.

The main options available to market leaders are:

  • Expand the total market by finding
    • new users of the product
    • new uses of the product
    • more usage on each use occasion
  • Protect your existing market share by:
    • developing new product ideas
    • improve customer service
    • improve distribution effectiveness
    • reduce costs
  • Expand your market share:
    • by targeting one or more competitor
    • without being noticed by government regulators

Market challenger

A market challenger is a firm in a strong, but not dominant position that is following an aggressive strategy of trying to gain market share. It typically targets the industry leader (for example, Pepsi targets Coke), but it could also target smaller, more vulnerable competitors. The fundamental principles involved are:

  • Assess the strength of the target competitor. Consider the amount of support that the target might muster from allies.
  • Choose only one target at a time.
  • Find a weakness in the target’’s position. Attack at this point. Consider how long it will take for the target to realign their resources so as to reinforce this weak spot.
  • Launch the attack on as narrow a front as possible. Whereas a defender must defend all their borders, an attacker has the advantage of being able to concentrate their forces at one place.
  • Launch the attack quickly, then consolidate.

Some of the options open to a market challenger are:

  • price discounts or price cutting
  • line extensions
  • introduce new products
  • reduce product quality
  • increase product quality
  • improve service
  • change distribution
  • cost reductions
  • intensify promotional activity

Market follower

A market follower is a firm in a strong, but not dominant position that is content to stay at that position. The rationale is that by developing strategies that are parallel to those of the market leader, they will gain much of the market from the leader while being exposed to very little risk. This “play it safe” strategy is how Burger King retains its position behind McDonalds. The advantages of this strategy are:

  • no expensive R&D failures
  • no risk of bad business model
  • “best practices” are already established
  • able to capitalize on the promotional activities of the market leader
  • no risk of government anti-combines actions
  • minimal risk of competitive attacks
  • don’t waste money in a head-on battle with the market leader

Market nicher

In this niche strategy the firm concentrates on a select few target markets. It is also called a focus strategy. It is hoped that by focusing ones marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The niche should be large enough to be profitable, but small enough to be ignored by the major industry players. Profit margins are emphasized rather than revenue or market share. The firm typically looks to gain a competitive advantage through effectiveness rather than efficiency. It is most suitable for relatively small firms and has much in common with guerrilla marketing warfare strategies. The most successful nichers tend to have the following characteristics:

  • They tend to be in high value added industries and are able to obtain high margins.
  • They tend to be highly focussed on a specific market segment.
  • They tend to market high end products or services, and are able to use a premium pricing strategy.
  • They tend to keep their operating expenses down by spending less on R&D, advertising, and personal selling.

See Also

Finding related topics

References

  • [[1] (http://www.apeccp.org.tw/doc/Canada/Decision/5f.htm)] - This is a link to the government of Canada's department of industry. It describes how they define market dominance for purposes of anti-combines actions and legislation.
  • Dolan, R.J. (1981) Models of competition: A review of theory and empirical evidence, Review of Marketing, American Marketing Association, Chicago, 1981, pg 224-234.
  • Hamermesh, R. Anderson, M. and Harris, J. (1978) Strategies for low market share businesses, Harvard Business Review, May-June 1978, pg 95-102.
  • Woo, C. and Cooper, A. (1982) The surprising case for low market share, Harvard Business Review, November-December 1982, pg 106-113.
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