Whatever the FTC and other governing bodies think, there is—and will always be—an ongoing battle for business leadership: a drive for domination. Just read the news about mergers. Kroger wanted to absorb Albertsons but was rebuffed. Denying a story in The Wall Street Journal, Shell may or may not be eager to absorb BP. Mars has been given the FTC go-ahead to acquire Kellanova (an oddly named spin-off from Kellogg’s that includes snack food brands such as Pringles, Cheez-Its, Eggo waffles, and Rice Krispies Treats).
The aim of these “weddings” is to dominate particular areas of excellence. The never-ending battle for market share is a fundamental, underlying principle of business. The reason is simple… market leadership pays.
In business as in life, everything is relative. When evaluating business performance, it is essential to consider relative quality, not absolute quality; relative value, not absolute value; and relative share, not absolute share. Your rating is interesting; your ranking is everything.
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Market Leadership Is Profitable
Decades ago, a foundational study was conducted at Harvard, which remains significant to this day. It revealed the dramatic importance of the Law of Dominance. This law is so fundamental, ignore it at your peril.
- One is wonderful,
- Two can be terrific,
- Three is often threatened,
- Four is usually fatal.
The famous study, known as PIMS, assessed the return on investment (pre-interest, pre-tax) versus market rank for 2,746 businesses in a four-year database. The data showed a clear and strong relationship between market rank and profitability. The study demonstrated that market share leaders are significantly more profitable than those businesses ranking four or worse in their markets. Firms with a market rank of #1 averaged an ROI of 31%. Those with a market share rank of #4 or below delivered an ROI of 12%. The data revealed that market leaders are approximately two and a half times more profitable than businesses ranked #4 and above. Aiming to be a #4+ business is not a viable business goal; it’s merely a hobby.
All leaders are not the same. There are dominators and there are marginal leaders. A market dominator is a business with a sales volume at least 1.5 times that of its nearest competitor. The remaining #1 businesses are marginal leaders. Businesses ranked #2 and #3 are the key competitors.
Additionally, market leadership encompasses more than just size. Market leadership also means leading in the mind: Are you perceived as a leader?
The results of the PIMS study were clear: market rank is a critical determinant of business performance. A market dominator is 52% more profitable than its nearest competitors and is a startling 183% more profitable than the market followers. The desire for market share leadership makes good business sense. Leadership pays. Domination pays even better.
For example, Verizon swallowed Frontier Communications, providing access to areas where Internet and phone service are spotty.
Now, let’s fast forward to our current business environment. In The Wall Street Journal’s report on the possible merger of Shell and BP, the article mentioned that this union would help Shell be #3. But, the merger would “bolster its (Shell’s) dominance in areas like liquified natural gas.” All of this money, just to be number 3, might require some intense strategy revision.
Mergers such as PepsiCo’s purchase of Siete grain-free, dairy-free chips and POPPI, the probiotic soda; Hyatt Hotel’s purchase of Playa Hotels and Resorts; Dick’s Sporting Goods purchase of Footlocker; DoorDash’s purchase of Deliveroo and Capital One’s purchase of Discovery Financial are designed to acquire market share in particular categories. Ad agency holding companies Omnicom and IPG are in the midst of a merger. Mergers are not just about being bigger. Mergers are also about being better and stronger.
Years ago, the former CEO of Barclays, Jes Staley, made an amazing statement. The goal for Barclays was to “become the sixth-largest investment bank in the world by revenue.” (Barclays was, at the time, the seventh.) The sixth?
It is irrelevant that the PIMS work is decades old: it provides a fundamental rule: being ranked below #3 in a market is a formula for failure. Focusing on being #6 is bad business leadership.
Here is another fundamental business principle: market segmentation is fundamental to modern marketing. Instead of aiming to be the #6 investment bank, CEO Staley should have defined a market segment in which Barclays could be the unquestioned leader.
The same applies to Shell, if the concept of this merger with BP is a consideration. Aiming to be #3 is not a leadership goal.
Beware of business strategies that aim for a small share of a big market. A low market share rank is a weak rank. Small can be beautiful. Small markets can be beautiful. But, small market share is not beautiful.
And note that all those marvelous small brands that capture our attention, such as Halo ice cream, really want to be bigger. Remember when activist investor Nelson Peltz had a proxy fight with P&G? He won a seat on the P&G Board. He promoted the idea to a company that created some of the world’s biggest, greatest global brands that P&G should start investing in and focusing on small brands.
Whatever your opinion, Jack Welch, possibly the most well-known CEO of GE, was a significant participant in the PIMS work. Mr. Welch ran GE according to the principles of The Law of Dominance. The GE portfolio strategy was to be #1 or #2 in every market in which GE competed. He understood and was vocal about the fact that whether the market was a niche market or a massive market, the aim was to be a market leader.
Basic business and brand principles are fundamental because they serve as the minimum requirements for how businesses should be run. Thinking that today’s world is different is nonsense. The Law of Dominance will not change with the times. Aiming to be #6 is bad business policy. Mr. Staley paid a price for that strategy. Aiming to be #3 is also a less-than-admirable move. Shell should keep this in mind.
Aim to dominate every market in which you compete. Why aim for anything less?
Contributed to Branding Strategy Insider by: Joan Kiddon, Partner, The Blake Project, Author of The Paradox Planet: Creating Brand Experiences For The Age Of I
At The Blake Project, we help clients worldwide, in all stages of development, define and articulate what makes them competitive at pivotal moments of change. This includes pricing strategies that propel their businesses and brands forward. Please email us to learn how we can help you compete differently.
Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Growth, and Brand Education
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