The Fallacy of Market Share

In our last Exceeding Expectations article we demonstrated how being in a high growth market sector and/or having a temporary market advantage are not reliable indicators of long term performance for a business. In this article we explain why “market share” is misunderstood and misused as an indicator of future performance – and so often also as a strategic goal. Given that the ONLY rationale offered to persuade Lloyds TSB shareholders to support the merger with HBOS was the “largest-market-share-in-UK-retail-banking-Gordon-has-given-us-the-nod” argument , this is a highly relevant subject to address.

The argument in favour of achieving high market share is that this creates many advantages that lead to superior financial performance. This fallacy has a corollary– the conclusion that high market share requires a very large organisation. Frequently this prompts boards to “shortcut” their way to increased market share through merger and acquisition. However as the record shows, M&A has a chance of between 50 and 80% of failing to produce value; what does this say about the advantages of high market share?

The research on this subject appears superficially to back the notion that high market share leads to superior financial performance. However one piece of research identified a crucial element needed if this superior performance is to be sustainable. The research, carried out at Harvard and still ongoing is titled Profit Impact of Market Strategies (PIMS). This research involved gathering performance data over many years from many thousands of business units to identify the business strategies most likely to lead to success in a range of contexts. In their book (“The PIMs Principles”) Robert Buzzell and Bradley Gale showed how their PIMS research discovered that only market share growth based on relative perceived superior quality will result in market share growth that delivers sustainable superior financial performance.

For an example of how the lack of relative perceived superior quality results in poor financial performance in spite of high market share we need look no further than DSG, the owners of Currys and PC World. This company built itself into the market leading electricals retailer and showed all the characteristics of a high market share operator, e.g. using its buying power to offer low prices and occupying prime retail sites throughout the UK. Three years ago, after one of our clients suffered one of the worst customer experiences we have witnessed from PC World’s so called Business Division, we looked at DSG from our Competitive Strength perspective and warned that all was not well. Since then other commentators began to voice concerns and in due course DSG’s profits began to slide along with its share price.

Then came the recession and of course this has meant a tough period in retail. In spite of this a few retailers have been able to report results that exceeded expectations whereas DSG announced trading results that were every bit as bad as expected. The media’s financial and business pundits once again cited market conditions, the credit crunch, shifts in demand for one technology or another, and so on. DSG attempted to cushion the bad news by reporting that trials of new store formats had delivered increased sales and margins. On the strength of this news one analyst actually changed his recommendation from sell to hold – obviously he has never heard of the Hawthorne Effect (research that showed the refurbishing of working environments can improve performance – but only for an extremely short time). The thinking (or is it a Prayer?) goes that if the market leader upgrades all their stores, the improved performance seen in the trial will replicate across the business to restore the high market share and once again deliver high profits.

We have to ask - has this analyst or any of the other commentators actually tried to buy anything recently from a DSG store? If they had, they might just understand why even an infinite number of expensive store refits will not stop DSG plunging further and crashing – why there is no sign of a competent pilot and no River Hudson nearby.

Recently, my wife and I popped into our local (large) branch of Currys. She wanted to buy a new electric iron. There was a reasonable choice of items lined up along a display shelf. The chief decision maker examined them and finally decided which one she wanted to buy. We looked at the lower shelves for the boxed item. It was not there – in fact, there were boxed examples of fewer than half the items “on sale”. After a search, I found two assistants busy chatting and asked for help. Visibly irritated at being interrupted, one of them came to the shelf, removed the label, disappeared to a computer terminal and then returned. “We don’t have one, but you can order it”. We asked when, if we were to order, would it be available? He did not know. He asked another lady assistant who said that a delivery would be in 4 days. Would it include that item? “Probably – if you order it”.

My wife asked if we could buy the display item? Could we have the box and instructions? “Oh no, we throw those away. We would be full of cardboard boxes, wouldn’t we?” My wife then asked how much reduction they would offer for the item as incomplete. “Oh no, we can’t reduce it because it is a current stock item. You can order it”. She walked out, fuming. We went straight to Sainsburys – a whole 300 yards. Within 10 minutes she found what she wanted and bought it.

This is why DSG are doomed. Disastrous Customer Service experiences and the inability to deliver the basic function of a “shop” (somewhere that sells things you can buy there and then) demonstrates DSG’s relative perceived inferior quality. Disposing of the packaging and thereby devaluing all their display stock is simply one of many inevitable, stupid consequences of the core problem. This core problem is low Comparative Competitive Strength for which no amount of “bigness”, whether in market share or anything else, can compensate.

Their new chief executive is promising change “but it will take time”. With rapidly diminishing Competitive Strength, my friend, you don’t have the time. This is a business behaving in a way that spells disaster even in good times. What hope does it have in a time of economic crisis? The Abyss looms – and a great deal faster than you may wish to believe. Size matters, a bit – the Titanic took much longer to slide under the waves than a rowing boat, but the only variable was the time, not the sinking. And, as a very large organisation, when DSG crashes, the tsunami will drown many others that do not deserve to die. If, as they have announced, DSG think they need redundancies – it is not in the stores – it is in their leadership.

If you own DSG shares, forget them, write them off. If you are a DSG employee, sorry, look for another job now. If you are a DSG Supplier – get ready for massive contractions at any minute. If you are a DSG Creditor – take protective action now. If you are a Financial Analyst, ask yourself if you are saying the right things but for the wrong reasons and consequently at risk now of giving wrong advice? If you are an Institutional Investor (on behalf of my pension fund perhaps?) and if you still hold a stake, you should be sacked, now.

If you think we are just picking on DSG, what about Lloyds TSB and HBOS? Sorry, Lloyds shareholders, it is probably too late, get ready to sue your Board members and the government.

The only hope the UK has in these troubled times is for every business to raise its game NOW. There is no longer time to pussy foot around. Every enterprise that fails, as DSG seems determined to do, will be an avoidable burden on the few survivors. Don’t expect the Government to help – they haven’t a clue about Comparative Competitive Strength or its importance to saving the British economy – just a few stalwart pursuers of Excellence will, if the banks don’t stop them, provide the only solid base for our future economic survival.

Frankly it makes us want to cry. But if you are of stouter heart, and want to know more about how you can raise your game – NOW – please have look at our website here and at the Comparative Strength Report page here.

Exceeding Expectations is brought to you by Steve Goodman and Tony Ericson. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. Each blog has a new article each month using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs are "You're having a laugh ... Seriously?", Business Bloop of the Month Award", "Capitalism or ... Common Sense" .

The Fallacy of the "Market"

As we move into the early part of 2009 one of the business names shortly to be added to the casualty list is Foxtons estate agents.

Foxtons grew rapidly on the back of the London property boom and became famous for the Minis in Foxtons livery darting around the streets of London. Jon Hunt, the founder, sold the business to BC Partners for £360m just before the credit crunch. Now comes the news that Foxtons have breached their banking covenants and BC Partners have conceded that its decision to buy the business was a mistake. “As housing markets fall, so do estate agents, so we got that wrong. In hindsight, we made the wrong assessment of the market,” said a spokesman.

Well yes you did, but the really wrong assessment was not “of the market” – it was of the company itself. Jon Hunt had done a great marketing job, the company Minis were just one example. He rode the boom astutely, opening more offices, taking on more staff, positioning the business as THE estate agent in London and timing his exit impeccably – good luck to him! Yet many who had attempted to buy or sell a house with Foxtons had perceived the company as inefficient, its staff incompetent and unprofessional (remember the Put-A-Sign-on-Anybody’s scandal?) and putting its own interests before those of its clients. A bit of research amongst Foxtons’ clients and London house owners who had had anything to do with them would have revealed a business that was likely to be unsustainable other than in a booming market.

There is a mindset amongst many investment analysts and managers that leads them to believe that investing in businesses in so called “high growth” market sectors and/or with apparently unassailable market advantage in their products/services is the Holy Grail that will produce the stellar returns they seek. This leads them all too often in to over-valuing the “biggest” – because, “obviously it must have grown more”. The same immature logic has driven company directors to pursue Top Line growth regardless of expense, because it will impress these analysts who will then recommend their shares.

This is just rubbish thinking because all “high growth” sectors and any market advantage are at best temporary and frequently illusory as BC Partners experience with Foxtons illustrates. There is no substitute for being a good, well run business that has developed a high level of Competitive Strength that ensures it stays that way.

In 2003 Irish Drinks Group C&C, launched Magners Cider. Described as “a triumph of marketing” the new concept of “Cider Over Ice” swept all before it. Sales grew strongly during three successive summers and into 2007’s early Spring heat wave. Over the same period C&C’s share price grew strongly too, from €2 to €14. However in reality this was based on just two assumptions – that no competitor would enter the market and that it wouldn’t rain.

Well, S&N launched Bulmers Over Ice in 2006 and recaptured 20% of the market - and it started to rain. In two months C&C shares dropped to €6 as sales and profits collapsed. The business simply did not have the Competitive Strength to maintain and build on the advantage it had gained with its new product. Their share price is now around €1.45, their Chief Exec has gone to be replaced by John Dunsmore former Chief Exec at, guess where, S&N!

For the most spectacular example of a booming market masking fundamental weaknesses in the business, look no further than the banks!

However an example of how this works in reverse is Sainsbury’s. For some time their market share, sales and profits wilted as competition from Tesco, Asda and Morrison’s hotted up. Financial and investment analysts were forever claiming that Sainsbury’s must reposition up market, down market, sideways, anywhere where there was less competition if they were to have a future. Successive managements arrived, tried, failed and went.

Then along came Justin King, with the novel strategy of making Sainsbury’s a “better business”. The result has been growing market share, sales, profits and the resilience that will see it through the downturn, all of which had nothing to do with the market. Can you imagine the previous state of the company enabling it to introduce its expanded non-food offer and its new value lines as effectively as they have done now? As a “better business” Sainsbury’s are not only spotting changes in the needs of their customers but are actually now capable of responding.

We are not saying that the market and/or market advantage from a break through product or process will not have an effect on the performance of a business, it is just that on its own it is not as crucial as many think it is and certainly not as significant as Competitive Strength. Businesses with high Competitive Strength conditions, what we call Excellent or Free, can not only respond faster to market changes but are frequently the instigators of those changes. They can profit from high growth and continuously create and renew their market advantage.

Experience and rock solid research has proven that how an organisation thinks and behaves, the deep seated managerial and behavioural values and competences of a business, are the main differentiator of whether over time they will substantially outperform their competitors and successfully withstand unpleasant surprises.

This manifests itself in the form of Competitive Strength, a new measure of business performance.

Yes, you can actually measure Competitive Strength, either in your own business or in any businesses you are considering investing in. The Competitive Strength Report Process is the only tool available from anyone, anywhere that provides an objective measure of Competitive Strength compared to the very best in the world. The Competitive Strength Report enables a business leadership to understand where they are positioned, in comparison to the very best, where their main threats lie, what the implications are and helps them decide very clearly, collectively and speedily what they need to do. There is nothing else as fast, as accessible or as affordable.

Find out more about it on our Competitive Strength web site page – or at the Competitive Strength Report website.

Exceeding Expectations is brought to you by Steve Goodman & Tony Ericson of ChangeWORLD. For more lighthearted comment with a serious point on current business related topics go to our You’re having a laugh … seriously? and Business Bloop of the Month Award