Monday, March 4, 2019

In Most Markets, 2 Suppliers Have 80% of the Profit

Market share often is a proxy for profitability. “On average, 80 percent of the economic profit pool was concentrated in the hands of just one or two players in each market,” say Bain and Company consultants. In other words, it really matters if a firm is number three in any market.

A recent Bain & Company analysis of 315 companies across 45 markets worldwide shows that the scale leader is also the economic leader in 60 percent of cases. But not always.

Still, scale no longer is enough, and often must be augmented by other attributes. Proprietary assets, unique capabilities, the most-profitable customer base or scope economies can be important, Bain consultants argue.  

Alos, the dynamics of scale are changing. It now is possible for small firms to obtain scale benefits without owning assets or capabilities. Think about rented cloud computing versus information technology asset ownership.

So speed now matters perhaps more than scale. What matters is the ability to react quickly to changes in customer demand and preference.
Consultants at Bain and Company also argue it is “better to be a leader in a bad market than a follower in a good one.” But that is only because it is better to be a market leader, no matter what the market.

One rule I always have believed correct is that market share translates to profit margin. As with most such rules, there are qualifications. All other things being equal, market share matters.

But all things often are not equal.  “In about 60 percent of industries, we define leadership by scale—the company with the most market share (measured by revenue or volume) wins.”

However, in about 40 percent of industries, the company with the highest share of industry economics is not the scale leader. They have the most loyal and profitable customers, Bain consultants say.

They have the most differentiated products, brands or manufacturing process. They dominate an industry “control point”—they are positioned to control far more profit than one would expect, from revenue or a differentiated niche game.

But it also is better to be a leader in any market than number two or number three.

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