The optimal market configuration for the firm

The principles of competitor selection imply that  holding a 100 percent market share is rarely, if ever, optim al.12 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? Hav­ ing 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 tem pt   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 greatest industry stability is critically dependent on industry structure and whether competitors are good or bad competi­ tors.   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. W ith 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 competi­ tors are bad competitors, large share differences among firms are neces­ sary 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 – l .

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 competi­ tors. Good  competitors  cannot play their  role unless they are viable, and even a good competitor may undermine a firm’s competitive advan­ tage or industry structure if driven to desperation. Desperate competi­ tors have a tendency  to violate beneficial industry  conventions  or engage in other practices that undermine industry structure and dam­ age 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/m obility  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 competi­ tors’ 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 im portant 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. W here com­ petitors 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

M aintaining the stability of an industry  requires continual  atten­ tion and effort by a firm, even if its competitors are good competitors. This is because competitors’ goals or circumstances may change. Hav­ ing 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-a-vis   its competitors is starting a time bomb ticking that may transform  a stable and profit­ able 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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