Successful Differentiation creates lasting market power and influence over customers or competitors. The traditional metric to measure market power and influence has been the “relative market share”.

Relative market share is still the predominant source of market power. Evidence studies realized by top consulting firms as BAIN & Company have shown that the most profitable companies in a competitive arena have a superior relative market share. According to Doctor Chris Zook, a partner in Bain & Company’s Boston office, this metric has been criticized for being used as the sole measure of market power and influence but remains a significant measure in several industries. Let´s answer the following question: What is relative market share?

Relative market share = firm’s market share/largest competitor’s market share

According to Doctor Chris Zook, the relative market share has been used simply because there is a correlation between companies with sustained growth over a decade and their leadership in their core business.  This leadership is measured by their market share relative to their largest competitor. Market leadership or Market Power and Influence is developed through time. Market power can be understood as the level of influence that a company has on determining market price, either for a specific product or generally within its industry. An example of market power is Apple Inc. in the smartphone market. Although Apple cannot completely control the market, its iPhone product has a substantial amount of market share and customer loyalty, so it has the ability to affect overall pricing in the smartphone market.

Doctor Zook has established there are 4 basic ways in which companies acquire market power and influence in a competitive industry, in their core business, and thereby drive scale.

Companies acquire Market Power and Influence in Many Ways.         Source: Chris Zook, BAIN & Company.

1. Customer-Based:

The most robust form of market power derives from building a uniquely high and structurally stable level of loyalty in a well-defined customer segment.  In other words, customer loyalty relates to those consumers that keep coming back to your store or to your online website. Consumers who are loyal to a brand, remain as customers because they believe you offer a better service and higher quality than anyone else does. This happens regardless of pricing or other financial reasons. Customer loyalty is built as a competitive advantage in an existing customer segment. Let´s think about a private pension company. In several countries from Latin America, the pension fund administrators or  AFP (Administradoras de Fondos de Pensiones) are private. Each individual can choose its respective AFP to administer its retirement’s savings. By law, a pension fund affiliation is mandatory, and each worker has a percentage of his/her salary retained by month. My mother is a Christian missionary of 72 years old who hangs out with elder ladies of her age. And since I still live with my parents (both Mom and Dad are retired), I see directly how local elders struggle with lack of benefits or value-added welfare programs for them. There is lack of these type of programs at a public and private-foundation level. The demand for these services is higher than the offer.

Some AFP (pension fund) loyalty programs to keep customer´s retention could be, for example:

1. Excellent Service to Clients: Offering superb customer service and depth of knowledge about commissions, fees, and savings since day one of affiliation.
2. Health Center Services for the top 10  senior general sicknesses: diabetes, oral health, depression, obesity or Metabolic Syndrome, respiratory diseases such as pneumonia and influenza, osteoporosis, arthritis, high blood pressure, dermatologic topic sicknesses. This service may include free consultations and medicines for free.
3. Free Sports Club Affiliation and Nutrition Consultation (gym, yoga, swimming and dancing classes for free)
4. Language Courses for free
5. A monthly supermarket voucher for a basic survival food package, subject to confirmation of the needs caused by poverty.

In addition, with these type of customer loyalty benefits,  the switching costs will be higher to the customer if considering to change to another AFP company. I believe AFP companies should see themselves as the friend to the seniors or retirees who worked their whole life and who will be in need. When pension funds for retirement companies start to see themselves as friends of people, many things will change in our society for the elders.

Let´s go to another example: Another way to build market power and influence through customer loyalty is by identifying or creating a new customer segment and dominating its experience of the service. For example, Starbucks coffee has outperformed the percentage of growth in coffee consumption since decades ago.

Starbucks Coffee Consumption has grown above the coffee growth consumption. Source: Starbucks.com

Actually, Starbucks serves more than 90 Million customers per week all over the world. The customer loyalty is a customer based source of differentiation for Starbucks. And it is caused by several customer-based initiatives. The Starbucks Reward Stars program, as one example, has been a remarkable digital and stores experience for those who consider themselves loyal to the brand. This success is only explained by a carefully orchestrated combination of product, ambiance, music, ubiquity, and omni-experience for each of Starbucks store formats and customer segments. Many other companies such as Nestlé had the idea to develop a chain of coffee houses, but Nestlé did not use their leadership to do so when the time was right 25 years ago.

2. Channel-Based:

Establishing market power or leadership in a new or existing channel of product or service distribution is the second most common model to gain market leadership. This is the exact point where your distribution channel may be considered as much of importance than the product itself. Examples of these type of business models were Dell by being a pioneer doing direct selling through the Internet. In the 1990s, The internet opened the potential in the industry to enter and gain market power and influence through it. Several banks and brokerage houses such as Charles Schwab did it more than a decade ago.  Actually, TD Ameritrade, Ally Invest, and Fidelity Investments are still at the top of the list. Other e-tailers such as Amazon.com has outperformed the market for years,  by using its differentiation strategy of internet channel dominance. The IoT or Internet of Things is an industry which opens the possibility to establish market power or leadership position otherwise non-existent in the past.

3. Product Development Differentiation

The differentiation through superior product development is the rarest form of market power and influence. According to BAIN, there are fewer than 5% of companies, which rely primarily on this method. Let´s go back to the case of Toys R Us… even though this company core business is selling toys and baby products, this company had little less to differentiate themselves in terms of the products themselves, but the excellence of its distribution channels (stores, online sales, etc.).

Apple Company has been an excellent example of differentiation through their products. Apple´s capacity to build superior product development engines through fast prototyping has been their value creator of superior competitive advantage. The first iPhone released by the year 2007, revolutionized an industry. The features of the first iPhone: tactic display, no physical keyboard, its simplicity and its new applications software ecosystem opened new possibilities and services to the whole world. The iPhone was a technology disruptor. It was able to enter a market dominated by Blackberry and Microsoft devices. In addition, it was able to change an industry and position itself (regardless the price) as a dominant market share company for several years since 2007.

4. Capturing Capital

The capital market mania over the internet brings companies a dramatic way to capture market power and influence by establishing a high market value, independent of market share and profits. Companies funded through venture capital as GoFundMe, Lynda; or through epic IPOs such as Alibaba, Facebook, and Twitter. All these companies have attracted massive amounts of investments. A Successful IPO from an internet company is surely a way to differentiate in racing for funding and attracting capital. In consequence, many of these companies have gained and will develop market power and influence just by accessing funds through capital markets. In the future, we foresee many IoT companies which will differentiate themselves in this area.

Largest Internet Company IPOs. Source: Statista.com

Tomorrow we will finish with the Bargaining Power of Buyers, and we are going to continue sailing to reach the fifth force of Porter.  Blessings to you.

Source References:

http://www.bain.com/about/people-and-values/our-team/profiles/chris-zook.aspx

http://www.business-portfolio-analysis.com/analysis/is-the-relative-market-share-still-relevant/

https://www.retentionscience.com/customer-loyalty-vs-brand-loyalty/

http://www.oecd-ilibrary.org/finance-and-investment/oecd-pensions-at-a-glance_pension_glance-2014-en

https://investor.starbucks.com/events-and-presentations/webcasts-and-presentations/default.aspx

https://members.starbucks.com/?utm_source=homepagehero&utm_medium=referral&utm_campaign=summer1&utm_content=summerfy16

https://www.statista.com/statistics/226797/largest-internet-ipos-in-the-us-by-issue-volume/

Note: All the pictures shown on this blog do not belong to me. I do not own any of the lovely photos posted unless otherwise stated.

Published by eleonoraescalantestrategy

Corporate Strategy Artist, San Salvador, El Salvador View all posts by eleonoraescalantestrategy