Part 2: Sources of New Market Share

This comparison seeks to clarify each concept. It is divided into several sections:

• Explanation of Volatility and Sales Growth
• Rules to Identify Volatility
• The Effects of Sales Growth and Volatility on Company Market Share

At the end of this comparison is a series of self tests on Sales Growth and Volatility. The tests present you with a Beginning Period and an End Period and ask you to suggest changes to customer and company results that would produce the requested combination of Sales Growth and Volatility. We provide one answer to each test for reference.

Throughout the comparison, to illustrate the concepts of Volatility and Sales Growth, we use a a consistent set of tables based upon a hypothetical example that we call the Base Case. The tables show the Beginning of Period, End of Period and a Summary of Changes During the Period. The Beginning of Period remains the same in every example. What changes is the End of Period state.

Explanation of Base Case and its Tables

EXPLANATION OF VOLATILITY AND SALES GROWTH

Volatility and Sales Growth are separable concepts. Neither depends on the other, though both change market share for a company. They usually exist side-by-side in a market and in a company.

• Volatility: Volatility occurs when customers change their suppliers, including when customers enter or leave the market.

Example 1: Volatility

• Sales Growth: A market’s sales grow when there is a net increase in total units sold by all suppliers to the total of all customers. This produces positive Sales Growth. A net decrease in total units sold to the total of all customers produces negative Sales Growth in the market.

Example 2: Sales Growth

Growth may occur without Volatility and Volatility may occur without Sales Growth. In Example #1, Volatility occurred without Sales Growth. In Example #2, Sales Growth occurred without Volatility.

It is useful to separate Sales Growth from Volatility because a company uses different strategic tactics to address issues of Sales Growth and Volatility. A company achieves Sales Growth by benefitting from its current Core customers’ sales growth.  Thus, Sales Growth is a passive result of the company’s previous choices and recruiting success of its choice of customers. The company’s market changes as its customers grow or shrink their own market shares.

On the other hand, to change its Volatility results, a company seeks first to reduce its Negative Volatility and then to produce Positive Volatility. It changes its Volatility results by improving its value proposition, through changes in its product and service package or in its pricing policies.

RULES TO IDENTIFY VOLATILITY

The overall rule to determine that Volatility has occurred in a market is as follows:

At least one customer must change the percentage allocation of its purchases.

This rule encompasses a customer entering the market, where the customer allocates purchases to new suppliers, and to a customer leaving the market, where the customer removes purchases from its suppliers.

You can examine Volatility in a customer, in a company and in the market:

For Volatility in an individual customer, you must have:

• An increase in the customer’s percentage of purchases allocated to one company, which produces Positive Volatility for that company.
• A decrease in the customer’s percentage of purchases allocated to another company, which produces Negative Volatility for that company.
• The Net Volatility among all existing customers is zero because every occurrence of Positive Volatility has a matching occurrence of Negative Volatility. In Example #1, Supplier 1 had Positive Volatility due to Customer A’s increase in purchases allocated to Supplier 1. At the same time, Supplier 2 suffered Negative Volatility as its proportion of the purchases of Customer A shrank from 40% to 25%.

For company Volatility, you must have:

• At least one customer that increases the percentage of purchases allocated to the company. This produces a Positive Volatility event for the company,
  
  OR
  
• A decrease in at least one customer’s percentage of purchases from the company. This produces a Negative Volatility event for the company.
• The company’s Net Volatility position is the sum of its Positive Volatility less its Negative Volatility. Usually, an individual company’s Net Volatility is either Positive or Negative.

Example #3: Company Volatility

The Market’s Volatility is the sum of all customer Volatility:

• The market’s total Positive Volatility would be the sum of all Positive Volatility from entering customers plus all customers changing suppliers. The market’s total Negative Volatility would be the sum of all Negative Volatility from customers leaving the market plus all customers changing suppliers.

Example #4: Market Volatility

For the market to show Net Volatility you must have either:

• Customers entering the market, which produces Positive Net Volatility,
  OR
  
• Customers leaving the market, which produces Negative Net Volatility. In Example #4, the market’s Net Volatility is negative 250 units because the Negative Volatility in the market was greater than the Positive Volatility.

THE EFFECT OF SALES GROWTH AND VOLATILITY ON COMPANY MARKET SHARE

A company may see a change in its market share due both to changes in Sales Growth with its existing customers and to Volatility.

The company’s market share changes due to Sales Growth, or changes in existing customer purchases, when:

• The company’s existing customers grow faster than their peers and purchase units from the company at a rate greater than the average growth rate in the industry. The company’s market share then grows due to the growth of its customers’ purchases.
• The company’s existing customers grow slower than their peers and purchase units from the company at a rate lower than the average growth rate in the industry. The company’s market share then shrinks due to the relative shrinkage of its customers’ purchases.

The company’s market share changes due to changes in customer Volatility when:

• Customers increase the percentage of their total purchases from the company (through Increase Use and Get In events). This is Positive Volatility,
  OR
  
• Customers decrease their percentage purchases from the company (through Decrease Use and Get Out events). This is Negative Volatility.
• The company’s market share increases if its Positive Volatility exceeds its Negative Volatility, producing Net Positive Volatility. The company’s market share declines if its Negative Volatility exceeds its Positive Volatility, producing Net Negative Volatility.

• An acquisition of one company by another produces a Positive Volatility event for the acquiring company and a Negative Volatility event for the acquired company.

SELF TEST ON SALES GROWTH AND VOLATILITY

In the following tests, you will suggest changes to the Base Case table below in order to produce a change in the marketplace or company performance that is requested in the test. To illustrate an answer, we will suggest changes that meet these conditions; however, your answers may differ from ours.

Suggest a change or changes to the Base Case table above that would have the following effect on the
market as a whole:

• Test #1: Negative Sales Growth, Negative Volatility Answer »
• Test #2: Zero Sales Growth, Negative Volatility Answer »
• Test #3: Positive Sales Growth, Negative Volatility Answer »
• Test #4: Negative Sales Growth, Zero Volatility Answer »
• Test #5: Positive Sales Growth, Zero Volatility Answer »
• Test #6: Negative Sales Growth, Positive Volatility Answer »
• Test #7: Zero Sales Growth, Positive Volatility Answer »
• Test #8: Positive Sales Growth, Positive Volatility Answer »

In the next set of tests, we will examine changes within one company, Supplier 1. Suggest changes in Supplier 1’s arrangement with its customers that would produce the requested results for Sales Growth and company Volatility:

• Test #9: Negative Sales Growth, Negative Company Volatility Answer »
• Test #10: Zero Sales Growth, Negative Company Volatility Answer »
• Test #11: Positive Sales Growth, Negative Company Volatility Answer »
• Test #12: Negative Sales Growth, Zero Company Volatility Answer »
• Test #13: Positive Sales Growth, Zero Company Volatility Answer »
• Test #14: Negative Sales Growth, Positive Company Volatility Answer »
• Test #15: Zero Sales Growth, Positive Company Volatility Answer »
• Test #16: Positive Sales Growth, Positive Company Volatility Answer »