In recent years, a growing number of business practitioners and theorists have postulated that one way for a company to increase its return is by increasing its market share, and studies appear to have confirmed this relationship. But the authors of this article refuse to accept the blanket inference that “more” is necessarily always going to mean “better. ” A large market share, they point out, can spell more trouble as well as more profit for a company; a given project promising higher returns than others will surely entail greater risks as well. Given this direct link between profit and risk, it behooves companies to manage their market shares with the same diligence as they would manage any other facet of their businesses.
This concept of managing market shares leads to some intriguing possibilities. Although most companies can profit by attempting to increase their market shares, some may conclude that they are at or possibly beyond the point at which expected costs and risks outweigh expected gains. The authors suggest various strategies that these companies might consider in attempting to manage their market shares. But high market share can also mean headaches. Companies possessing it are tempting targets for actual and potential competitors, consumer organizations, and government agencies. IBM, Gillette, Eastman Kodak, Procter and Gamble, Xerox, General Motors, Campbell’s, Coca Cola, Kellogg, and Caterpillar are cases in point.
Their market shares have been their blessing and their curse—their curse because they must make their decisions and manage their operations with much more care than do their competitors. These companies cannot aggressively seek larger shares because further gains may break the dam and let the waters of antitrust action pour in. In some cases, these companies may even have to give up some share in order to stem the tide. Smaller competitors, for example, can direct certain types of attack against larger organizations, attacks that would not work as well against companies of equal or smaller size. One type of attack has been to file private antitrust suits in an attempt to demonstrate that the larger competitor has violated antitrust laws while amassing its dominant share.
In one of these suits, a court recently ordered IBM to pay Telex $259. 5 million this was later reversed by an appeals court. Eastman Kodak, Xerox, Anheuser Busch, Gillette, and General Foods are currently involved in other private antitrust actions. 2 Another type of attack involves the use of comparative advertising. Avis, B. F.
Goodrich, Seven Up, and others have found it profitable to mention or picture the products of their large competitors in their ads, and then to suggest the superiority of their own products. Yet another risk is posed by consumer or public interest organizations. A larger market share usually means greater public visibility; consumer groups may choose the more visible companies as the targets of their complaints, demonstrations, and lawsuits. Campaign GM—the proxy battle to force General Motors to take a number of actions believed to be in the public interest—was conducted against the largest and most visible auto manufacturer. Similarly, SOUP—Students Opposed to Unfair Practices—was originally formed to fight the use of alleged deceptive practices in the advertising of Campbell Soup, the leader in the soup industry.
Eastman Kodak, First National City Bank of New York, and DuPont are three other dominant market share companies that have been singled out by consumer or public interest organizations. Such attack by a consumer group can, of course, create ill will for the organization, as well as involve it in costly litigation. More high market share companies can expect antitrust suits when the FTC begins to exercise its newly won authority to require line of business reporting from major corporations. With such attention focused on their daily operations, multiproduct companies will find it harder to disguise their dominance of a particular market, although they may be able to disguise its profitability through arbitrary allocations of fixed overhead. Congressional pressure to fight inflation through stepped up enforcement of the existing antitrust laws will also cause severe headaches for many high market share companies.
Despite this recommendation, we feel that an organization’s goal should not be to maximize market share, but rather to attain the optimal market share. A company has attained its optimal market share in a given product/market when a departure in either direction from the share would alter the company’s long run profitability or risk or both in an unsatisfactory way. A company finding its current share below the optimal level should plan for market share gains; a company that is at its optimal market share should fight to maintain it; and a company that has exceeded it should seek to reduce its current share. Now consider the company that can expand its plant and market size. Usually this permits economies of scale in production, distribution, and marketing. A larger company can afford better equipment or more automation that lowers unit costs.
It can obtain volume discounts in media advertising, purchasing, warehousing, and freight. It can attract the more lucrative customer accounts that want fuller services. And it can gain distributor acceptance and cooperation at a lower cost. Empirical studies bear this out. One of the best and most recent is the Marketing Science Institute’s “Profit Impact of Market Strategies” PIMS project.
This study found that:At different levels of market share, a company’s risk also changes. Risk is high for low market share companies, declines as market share increases, and then increases again at very high share levels. Risk is high at low market share levels because a business is subject to competitive forays by stronger competitors, cannot afford adequate marketing research and promotional spending, and is vulnerable to sudden changes in consumer tastes or spending. Risk starts to fall with increased market share because an organization can engage in more market research, operate better information systems, recruit more experienced marketing personnel, and spend more on marketing. Risk reaches a low point at a high share level and then may begin to increase at higher levels because of the growing probability that the government, consumers, and competitors will single the business out for specific attack.
Management should also examine a specified lower share level, taking into consideration the cost, profitability, and decrease in risk at each level. If a lower level of risk does not compensate for the reduced profitability which may or may not exist, since prices may be higher or marketing costs lower and profitability unchanged and for transitional costs, then the specified lower market share is not optimal. If the company uses this technique for a number of alternative market share levels and cannot find one that offers a more satisfying balance of profitability and risk, then it is at its optimal level. A third strategy for building market share is distribution innovation. In this instance, the company finds a way to cover a market more effectively. Timex achieved its growth as a watch manufacturer by entering unconventional outlets like drugstores and discount stores.
These outlets then refused to carry additional brands of low priced watches, leaving Timex king of the mountain. Avon achieved its spectacular growth as a leader in cosmetics by resurrecting the old and neglected channel of door to door selling rather than by fighting bloody battles for space in conventional retail outlets. Such organizations find, however, that stabilizing their share is almost as challenging as expanding it. Underdog competitors are constantly chipping away at the stable company’s share. They introduce new products, sniff out new segments, try out new forms of distribution, and launch new promotions. One of the most annoying and common forms of attack is price cutting.
The high share company is always wrestling with the question of whether to meet price cuts and maintain its share or give up a little share and maintain its margins. If the high share company maintains its prices, it loses share. If it loses more than it expects, it may discover that rebuilding costs more than the gains from holding prices. Several high market share companies have apparently used demarketing to reduce their shares to less risky levels. Procter and Gamble, for example, has allowed its share of the shampoo market to slip from around 50% to just above 20% in the past few years—much to the surprise of its competitors.
In this period, the company has delayed reformulating its old brands Prell and Head and Shoulders, has tried to introduce only one new brand which was withdrawn twice from test markets, and has not attempted to “buy” back its share with heavy spending on advertising and promotion. 6 It seems fair to speculate that Procter and Gamble’s passive response to its decline in market share is deliberate; it may be motivated by a desire to avoid antitrust difficulties like those it has encountered with Clorox and, recently, with its detergent products. 7Finally, the demarketing experience of ReaLemon Foods, a subsidiary of Borden, deserves comment. ReaLemon implemented a selective demarketing strategy to avoid antitrust problems, but it reversed its strategy too soon and paid a price. Until 1970, ReaLemon held about 90% of the reconstituted lemon juice market. According to industry sources, ReaLemon at that time began to allow companies on the West Coast and in the Chicago area to make inroads into its share through fear of antitrust attack.
By 1972, however, a Chicago competitor, Golden Crown Citrus Corporation, had captured a share that ReaLemon considered too large. ReaLemon retaliated. As a result, the Federal Trade Commission filed a complaint in 1974 charging ReaLemon with predatory pricing and sales tactics. 10 The lesson to be learned from ReaLemons experience is that once a high market share company allows its share to fall, it must be careful if it decides to reverse itself. Organizations have also used public relations and advertising to publicize their position on a controversial issue. Major oil companies took out expensive newspaper ads during the oil and gas shortages to defend their high profits—arguing that they were needed either to finance future energy growth or to make up for depressed profits in the past.
These ads probably did not convince a single skeptic and, if anything, made the public angrier at the thriftlessness of full page spreads defending oil profits. Some critics have called this “ecopornography” and have complained that these ads reduce government tax revenues, since corporations, unlike private citizens, can treat the cost of political messages as a legitimate business expense. The high share company may attempt to reduce the risks associated with its position by cultivating better relations with its competitors. There are numerous ways in which this can be done. Organizations may help find supplies of raw materials, or even sell the material outright. They may conduct advertising campaigns that promote the product category rather than their specific brands.
They may refrain from reacting strongly to the strategy changes of their rivals. They may supply valuable research data and other assistance to smaller competitors through trade association activities. They may provide price umbrellas. And they may hold back the rate of new product introduction. Of course, the company that chooses to use competitive pacification strategies must be careful to avoid behaving in what could be considered a collusive manner.
Both the Justice Department and the Federal Trade Commission have been the butt of dependency strategies. In a chapter entitled “The Politics of Antitrust,” the authors of The Closed Enterprise System a Ralph Nader venture cite numerous cases in which the Justice Department has been subjected to and has sometimes succumbed to pressures by elected officials to curtail antitrust actions. 11 The most noteworthy example, of course, is the ITT case. Similarly, the supposedly independent FTC has not found itself totally immune from pressures by elected officials, since Congress appropriates its budgets and the President appoints its commissioners. Many elected officials are willing to exert pressure on these and other enforcement agencies because they fear that they will lose campaign funds and other forms of political support, defense supplies, and employment opportunities for their constituencies if large, powerful companies are successfully prosecuted under antitrust or other laws.
Closely related to dependency strategies are legislative ones. A high market share company can attempt to convince Congress to pass legislation giving it special treatment under the law. For example, labor unions, professional athletic leagues, banks, and newspapers have all received special treatment under the antitrust laws. Special legal treatment has also been offered to many companies in the form of subsidies, tax loopholes, and tariff reductions. Thus successful use of legislative strategies can practically eliminate a company’s risk of being the target of an antitrust attack and/or help stabilize earnings at high levels. A high market share company that has successfully won the public trust is Giant Foods, a major food chain in the Washington, D.
C. , area. 14 Giant Foods interpreted the various consumer criticisms of the late 1960s not as presenting unwelcome problems but as offering useful new opportunities. So it took the initiative and introduced such consumer oriented programs as unit pricing, open dating, and some nutritional labeling. It also carried an extensive supply of less expensive private labels to enable consumers to hold down their costs.
It publicized money saving food buys and supported the meat boycott to bring down consumer costs. And it appointed Esther Peterson, former White House special assistant for consumer affairs, as a consumer affairs advisor. All of these steps made it a consumer champion and won it many friends and patrons. Nonetheless, evidence is still needed to prove that a company assuming the role of consumer champion, with all the expense this entails, is compensated in terms of either market share or lower risk. It seems to be a part that only one company in each industry can play meaningfully, since others are typed as weak imitators.
However, in an age of such formidable social problems as high prices, environmentalism, shortages, antibusiness sentiment, and changing life styles, these problems should be regarded as disguised opportunities for the companies that have the courage and imagination to perceive them. More often than not, the high market share organization will find that it must use share reduction or risk reduction strategies to align these two shares. Unfortunately, the use of many share and risk reduction strategies can have undesirable social consequences. Demarketing strategies of a highly discriminatory nature, certain public relations strategies, competitive pacification strategies, dependency strategies, and legislative strategies can all produce outcomes that are not in the best long term interests of major portions of society. Therefore, the high market share company should give serious consideration to those strategies that not only fill its coffers but also respond to consumer and social needs.