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Market position and company size

A good market position of a supplier corresponds to a high probability that his offer will win the bid against other offers which the customer also considers in his purchase decision.

Strictly speaking, market position is first a property of a single offer.

In businesses that make only a few offers with high sales volumes, such as the capital goods business, it may make sense to evaluate the market position of a single offer. In most cases, however, the market position is described statistically, e.g. for certain time periods, for similar customer segments or for similar product groups. For this purpose, absolute and relative market shares are determined (cf. the examples of market share determination in the post “Market Position”). However, a pure market share analysis – whether absolute or relative – is not sufficient for a strategic understanding of market position.

Relative market share

If the customer buys from one competitor and not from the others, this inevitably leads to a shift in relative market shares: One gains sales, all others stay where they were and thus lose relative to the winner. The change in relative market shares, in turn, correlates strongly with absolute variables such as sales volume, number of employees, etc. However, the correlation is not compelling. In declining markets, for example, it is possible to gain relative market share and still have to record declining sales.

Size is important for relative market share, but not always

From a management point of view, the following is essential: The probability that customers will buy from one company and not from another is, in principle, completely independent of the current size of the competitors. If, for example, a clever individual creates (and patents) a new, superior solution to an existing customer problem, this individual can quickly improve his market position compared to a large corporation that only offers the outdated solution.

Accordingly, size is an unfortunately not guaranteed, but nevertheless probable consequence of a good market position. In other words: The market position predetermines growth and thus future sales volume. Thus, it can be assumed that the group in question had a strong market position in the past and is therefore large today. If the group does not succeed in bringing its market position, which has come under pressure, back into shape through innovation, it will lose size, while the individual – if he does everything right and is also a little lucky – may become the large group of tomorrow.

There are interdependencies between market position and company size. For example, the limited production capacity of the individual can have a negative impact on his market position. If extensive, interwoven structures hinder consistent responsibilities or adequate adaptation to changing market conditions, size can also have a negative impact on market position. It is essential that managers clearly distinguish between market position and size: On the one hand, operational result variables such as sales, sales growth, absolute market shares and liquidity are considered. On the other hand, internal piloting variables and relative market shares are decisive for the market position.

To be able to state the position of a vendor “in the market”, it is of course first necessary to outline which market is to be analyzed. It is often the case that companies have a good market position locally. If, however, customers consider not only local offerings but also those of global players, the position in the global market must also be included in the strategic assessment. After all, it is of no use to the local champion if local customers prefer to buy from international players. In the end only one gets the definitive contract – all other competitors can only book costs, but no sales.

Market is a set of purchasing decisions

“The market” must not only be defined geographically. At its core, it is about buying decisions that have a different structure. For example, one can have a good market position with existing customers, but a poor one with new customers. Seen from the customer perspective, market is a set of purchasing decisions that are similarly structured. Customer benefit analysis helps to analyze the situation clearly.

AMPLE for Sustainable Success

There are five elements, or “top controls”, that constitute the uppermost deciding parameters of any successful organization. Sustainably successful companies organize themselves and thus also their management tasks according to these, which we call AMPLE for short, as described below.

Attractiveness for employees

Every organization must be able to find and retain employees who have the skills, abilities and knowledge to invent, develop and manufacture products and services in a customer-focused manner and to operate the necessary internal processes in line with the needs of the customers and the own organization.

Therefore, conditions must be created in the organization that appear more attractive from the point of view of existing and potential employees than those of other potential employers. Good pay is an important factor. However, surveys repeatedly show that professional and position-related development opportunities, further education opportunities, employee promotion and, above all, the purpose of the work and the way of working together are decisive.

Market position

A company’s market position improves when its own products and services generate more benefits in the eyes of existing and potential customers than the offers of other providers. Net sales price is only one factor. Rather, market position depends on whether in customers’ purchase decisions the company’s offer-benefits are ranked higher than those of other suppliers.

Profitability

The net proceeds generated must cover the costs of the entire current operation, enable the preservation of the existing substance, and achieve a return in line with the market for all investors. In addition, money for the development of future success potentials must also be earned.

Without generating these funds, a company cannot invest enough in its market position and in evolution. It will not be viable in the medium term. In order to do this it is also necessary to improve internal input/output ratios, i.e., to increase productivity everywhere and continuously.

Liquidity

If a company does not have enough available funds (cash balances or open credit limits), it can neither pay wages nor invoices due on time. This is usually the end, as only a few can avert bankruptcy. Solvency at all times must therefore be planned and controlled in both the short and the long term.

Evolution

Every company must permanently develop further and improve. Other suppliers offer existing products and services cheaper, products or services become too expensive to produce, or are no longer in demand.

Internal, especially administrative processes, must be adapted to new requirements and handled more efficiently. This requires constant innovation and improvement. Evolution is indispensable. Many formerly world-famous companies have disappeared because they did not promote their evolution with enough vigor.

A five-pointed star is chosen for the AMPLE representation to indicate that the relationships between the five elements must be brought into a fluid equilibrium if an organization is to be sustainably successful. The difficulty in this endeavor is that the interactions between the five elements can be both supporting and contradictory.

For example, if a company tries to improve its market position by granting discounts or reductions, capacity utilization in the factory increases, but due to lower net revenues per unit, contribution margins decrease and, as a result, cash flow and profit decrease. Due to the high capacity utilization, new investments in plants become necessary, but due to the lower cash flow the money for this is only available to a limited extent. Lower cash flow also means that less can be invested in evolution and that less money is available to improve the attractiveness of jobs. AMPLE will fall out of the flow equilibrium and, if countermeasures are not taken in time, insolvency will occur in the medium term.

Further explanations of our AMPLE can be found in section 1.1. of the book Management Control with integrated Planning, chapters 1.1 and 2.