The optimal market configuration for the firm

The principles of competitor selection imply that holding a 100 percent market share is rarely, if ever, optimal.54 It is sometimes more sensible for firms to yield position and allow good competitors to occupy it than to maintain or increase share. While this is contrary to managers’ beliefs in some firms and almost heretical in others, it may be the best way to improve competitive advantage and industry structure in the long run. The right question a firm should ask is: What configuration of market shares and competitors is optimal? Having described the way in which a firm can identify and influence good competitors, I will now consider the configuration of competitors that is likely to best serve a firm’s long-run strategic position.

The determinants of the ideal market share for a firm in general terms are numerous and complex. It is possible, however, to lay down some general principles for assessing the share a firm should hold and the ideal pattern of competitors. I first describe the factors that determine the ideal configuration, and then consider how a firm should move toward the ideal configuration given the existing competitor configuration.

1. The Optimal Competitor Configuration

A firm’s optimal share of the part of the industry it is targeting should be high enough not to tempt a competitor to attack it. A firm must also have sufficient market share superiority (combined with its other competitive advantages not related to share) to maintain an equilibrium in the industry. The gap between leader and follower shares required to preserve stability  will vary  from industry  to industry  as I will describe below.

A number of structural characteristics influence a leader’s optimal share: The distribution of market shares among firms in an industry that leads to

The distribution of market shares among firms in an industry that leads to the greatest industry stability is critically dependent on industry structure and whether competitors are good or bad competitors. The most im portant industry structural variables determining the ideal pattern of shares are the degree of differentiation or switching costs present in the industry and whether or not the industry is seg-merited. Where there are few segments and little differentiation or low switching costs, significant market share differences are usually necessary for a stable industry. With segmentation or high levels of differentiation, conversely, firms can coexist profitably despite similar shares because they are less prone to see the need or opportunity to attack each other.

The nature of competitors is equally important. Where competitors are bad competitors, large share differences among firms are necessary to preserve stability because bad competitors tend to take destabilizing actions if they perceive any opportunity to succeed. Where competitors are good competitors, conversely, little share differential may be necessary to discourage attacks.

These considerations combine to yield the implications shown in Figure 6-1.

The pattern of generic strategies in an industry is also vital. Firms with different generic strategies can coexist much more easily than firms that all converge on the same generic strategy. Thus a firm must look beyond market shares alone in assessing the configuration of competitors in its industry.

Figure 6 -1 . Competitor Configuration and Industry Stability

It may be beneficial for the share not controlled by leaders to be split among followers rather than held by one. This means that followers will be pitted against each other instead of eyeing the position of the leader. Followers who are pursuing different focus strategies are even better than followers who are competing head on. It is also essential that followers be truly viable and offer a credible deterrent to new entrants, or fragmentation of the follower group can backfire and invite new entry.

2. Maintaining Competitor Viability

A firm must pay close attention to the health of its good competitors. Good competitors cannot play their role unless they are viable, and even a good competitor may undermine a firm’s competitive advantage or industry structure if driven to desperation. Desperate competitors have a tendency to violate beneficial industry conventions or engage in other practices that undermine industry structure and damage industry image. They also have a tendency to look for salvation through being acquired, and may in the process introduce a threatening new player into the industry. Finally, the managements of desperate competitors are frequently changed. A new management can convert a good competitor into bad one.

The market position necessary for a competitor to be viable varies from industry to industry depending on entry/mobility barriers; it is less than 5 percent in soft drinks, but probably more than 10 percent in frozen entrees. A firm must know the market position necessary to keep its good competitors viable, and how this may be changing as a result of structural evolution. It must also allow good competitors enough successes to lead them to perpetuate their strategies, rather than change them in the face of repeated problems.

3. Moving Toward the Ideal Competitor Configuration

The considerations described above suggest how competitors should ideally be distributed. To decide whether to move toward the ideal, however, a firm must calculate the cost of gaining position or, conversely, the risk of incrementally yielding it. Yielding share can be destabilizing by tempting competitors to take even more, or by sending unfortunate signals to potential entrants.

A firm may need to gain share not only to increase its own sales but also, as we have seen, to improve industry structure through a more stable competitor configuration. The cost of gaining share will be a function of who will lose share in the process. The losing competitors’ goals, capabilities, and barriers to shrinkage will be especially critical. A competitor’s goals, commitment to the business, and the importance it attaches to share are important to assess. Its capabilities will determine the cost of wooing away buyers from the competitor.

Barriers to shrinkage are barriers to reducing position in (though not completely exiting) an industry. These are closely analogous to exit barriers, and will be high where fixed costs are high because of the high penalty for reducing volume in existing facilities. Where competitors have high stakes in an industry, goals stressing market share, or high barriers to shrinkage, it may well be more costly to gain share than it is worth. In such industries, upward movement toward the ideal share should be slow and take advantage of opportunities posed by unfolding industry events.

The risk of yielding share to improve competitive advantage or industry structure will be a function of the difference in relative strength between the firm and competitors. If the gap is large, then a loss of share is unlikely to tempt competitors (or potential entrants) to upset the industry equilibrium by attempting to take even more share. The risk of yielding share is also a function of the inherent credibility of the firm in retaliating—a firm with a tough image faces less risk than one with a statesman’s image. Finally, the risk of yielding share also depends on the ability of a firm to yield share in a way that will appear logical to other firms (including potential entrants) rather than be taken as a sign of weakness.

4. Maintaining Industry Stability

Maintaining the stability of an industry requires continual attention and effort by a firm, even if its competitors are good competitors. This is because competitors’ goals or circumstances may change. Having enjoyed for some years a relatively profitable number two position, for example, a competitor may decide that more would be better. Or a change in its corporate parent or a shift in top management may lead a competitor to change its goals or assumptions. For example, the acquisition of Beaird-Poulan by Emerson Electric dramatically raised the ambitions of this regional chain saw manufacturer. Changes in industry structure may also create pressures on a competitor to gain share in the short or long run in order to remain viable. Driven to the wall, even a good competitor can touch off a process that destroys an industry.

These considerations suggest that a firm must continually work to manage its competitors’ expectations and assumptions. This may require periodic competitive moves, aggressive market signaling, and investing in mobility barriers. The aim is to make sure competitors do not make faulty estimates of their strengths or a firm’s commitment to the industry. Procter & Gamble is a good example of a firm that manages expectations through regular product changes and marketing investment. A firm that rests on its laurels vis-à-vis its competitors is starting a time bomb ticking that may transform a stable and profitable industry into one in which there is a costly battle for market share.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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