StrategyStreet / Tools / Symptoms and Implications / Costs / Some industry leaders have lower returns than the smaller competitors




Some industry leaders have lower returns than the smaller competitors

Symptom: Some industry leaders have lower returns than the smaller competitors.

Implications for the market:

  • Size alone does not create better returns. In the average mature industry, less than a third of share leaders also lead their industries in returns on investment. In hostile market, that proportion ins even lower.
  • Share leaders fail to lead in returns for two principal reasons:
    • Poor customer screening: These leaders accept all customers, including those who will never return their cost of capital and who force the leader to offer benefits that do not pay for themselves.
    • Ineffective cost management: These leaders have failed to force the creation of the economies of scale their relatively large size should permit.
  • Low cost starts with the pursuit of customers that the company can serve well and finishes with a management system that ensures unit costs fall as unit sales rise.

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items:

Analyses:

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

  • "Achieving The Low Cost Position"Most people think primarily of physical costs. However, a second, less understood type of cost is more important and holds the key to achieving the true low cost position
  • "Is Bigger Really Better?"In the average large industry, the market share leader is only slightly more likely to lead the industry than is any one of the next three competitors in the industry. Market share leaders often fail to become return leaders because they serve some customers who yield low returns and rely on size alone to create economies of scale.
  • "Use Subtle Strategy in Tough Markets"A hostile market operates differently than a market with "normal" competitive conditions. But as difficult as a tough market can be, it can also present an astute management team with an unusual opportunity.
  • "What We Do Know Can Hurt Us" A little knowledge is a dangerous thing. For the business leader, the very abundance of knowledge poses a danger.