StrategyStreet and the Board of Directors
SEGMENTS
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2. How will we increase our market share with these Core customers?
The board should understand the company's current and future market share with Core customers. Market share changes signal the strengths and weaknesses of the company compared to its competition. The board would prefer a rising market share or, at least, a high share if the company's share has stabilized. The company's share of the total market is less important than is its share with its Core customers. The market share the company holds with customers who are Non-core is unsustainable since the company cannot finance its sales to that part of the market over the long-term.
Further, the board should pursue an understanding of how the company's market share changes. The company has two separate and complementary routes to grow its share with Core customers. The first is to grow with its best Core customers. The second is to beat competition in managing the Volatility of Core customer relationships. If the company has aligned itself with fast growing Core customers, then these customers will grow faster than their peers in their own markets. This high growth by the company's customers pulls the company along with it. The company grows its market share because its customers are increasing their shares. This market share growth results from choices the company made some time ago to pursue the market's fast growing Core customers.
But, what if the company wants to grow faster than its current customers grow? In that event, the company must perform better than its competitors in managing the Volatility among the market's Core customers. Volatility measures the percentage of the annual customer purchase volume that changes suppliers. Volatility increases the company's market share if it is positive, where the company gets into new customer relationships or increases its penetration of existing customer relationships. Negative Volatility reduces the company's market share. The company suffers Negative Volatility when its customers remove it from their purchasing relationships or when the company's penetration of an existing customer's purchases falls. When the company's Net Volatility is positive, the company is likely to be gaining market share. Share is likely to be falling if the company's Net Volatility is negative.
Of the two measures, current customer growth and Net Volatility, Net Volatility is usually a better indication of the company's strategic health. The company's current Net Volatility is its most recent report card from customers on the quality of its value, Performance for Price, compared to that of competition. On the other hand, most customer relationships, once established, last for several years. The feedback the company gets from the relative growth of Core customers reflects more on how the company performed several years ago.
Net Volatility tells us about today's policies. For example, a consumer products company had a high degree of pricing freedom. For several years the company's market share increased because it raised its prices frequently. After a few years it found that its market share in dollars was increasing. But its market share in units of product was falling, as low-end competitors entered the market underneath its price umbrella. It was suffering Negative Volatility as low-priced competitors gradually eroded the unit market share of the company. And this Negative Volatility was a better measure of the strategic health of the company. It had a small, but fast growing illness.
For further discussion of this question, see:
Basic Strategy Guide Step 9: Separate the sources of the Company's change in share.
Basic Strategy Guide Step 10: Compare the Company to the industry on the components of volatility.
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