Why do some companies thrive and dominate their market segment, only to later become an afterthought? Market dynamics and the Rule of Three explains how some companies succeed and some fail.
Most industries and market segments, including the automotive aftermarket, will have market share dominated by three competing companies. This article will take that a step further and show how companies using the Rule of Three can plan a market share strategy that will help ensure profits in the future.
Definition: Rule of Three marketing
To revisit an October 2003 article we wrote for SEMA News, market share is the result of a complex combination of market dynamics, strategy, products and consumer demand, among other things.
In mature industries or market segments, where growth and market share have stabilized, three companies usually end up dominating market share. Marketing experts are still divided on why this phenomenon occurs but the fact remains that it usually does.
If an industry does not have three dominating companies, that in itself can predict the future and indicate that the market hasn’t yet matured and a shakeout or consolidation is on the way.
It was also shown that these dominating companies usually have common characteristics: they will be broad line manufacturers or retailers, with high sales volume, serving many different types of customers and market segments. Companies like this will usually sell a lot of commodity type products, and usually have to slug it out in the marketplace competing on price.
Two research studies examined dozens of industries over a 25 year period, from 1950 through 1975. The researchers discovered that more than half of the companies that were market leaders lost their number-one position to a competitor during over that 25-year period.
Rule of Three: other end of the scale
At the other end of the scale, there are many smaller companies that also have common characteristics. They thrive by concentrating on a narrow segment, and their customers usually look up to them as experts in their field. These smaller, agile companies usually don’t have to compete on price, but instead offer superior customer service and can quickly react to, or create, new trends. These companies can quickly respond to new trends within their fields, or even create new trends. These smaller companies are rarely successful selling commodity products, either they avoid them intentionally or they’ve just never had success with them in the first place.
Rule of Three: stuck in the vast wasteland in the middle
In the middle of most industries are less profitable companies that are stuck between a marketing rock and a strategic hard place: They’re too small to compete with the giants and their economies of scale and distribution, and too big to compete with the nimble specialized companies.
These mid-sized companies are often those that started out small and grew but now lack a good long-term strategy, or mid-sized companies that tried to chase the much larger companies that dominate a market. Some may be smaller, specialized companies that have been successful in one market segment and tried to expand into new segments, forcing them to compete as a newcomer against other established experts as they try to grow into a broad-line company.
There are clear lessons in all of this for SEMA- and Auto Care Association-member companies. In this article those lessons will be taken a step further: What long-term competitive strategies offer the greatest chance for survival?
Business Strategy 101: Define your core competencies
The initial step a company must take is simple but usually overlooked: Figure out what it does best.
A company should make an honest appraisal of its core competency, and employees need to understand what the company is good at doing. Is it good at developing new products and bringing them to market quickly? Is it good at marketing itself? Does it excel at distribution and logistics? Does it have superior customer service? Sometimes it is difficult for managers and employees to take a step back and make this impartial appraisal.
Most often the best-run companies will have a core competency that falls into one of three areas: product development and innovation, customer relationships and customer service, or operations. Take a look at successful companies in any industry, including the performance automotive aftermarket, and they can usually be categorized by excellence in one of these three categories.
Companies that excel in product development and innovation might be good at developing innovative new products, and the best ones will even obsolete their own products by bringing out better ones before their competitors have a chance to. Or they might be good at developing new trends as a result of their innovation. These companies don’t bother competing on price, they don’t have to. Today’s best example: Apple.
Companies in the next category, having excellent customer relationships, can take a variety of forms. Smaller companies in this category can offer personalized one-on-one attention and service to their customers. Larger ones can use powerful databases to understand and service their customers better than their competitors. These companies know their customers and their customers’ needs inside and out. The really good ones know their customer’s future needs.
The last category is operational excellence. These companies can do amazing things, like ship a package from coast to coast overnight, and be able to tell their customer exactly where it is the entire time and when it will arrive. Or serve millions of cheeseburgers at thousands of locations around the world, all tasting mostly the same, in less than a minute after a customer places a custom order.
Market Strategy 101: Evaluate your company’s market share
The second step a company must take is to determine how much market share it has, and how much is available to gain and at what cost? If a company already has a significant share of the market, it should know how its market share can be defended or how it could expand the market.
It is also necessary to understand how stable the marketplace is-is it growing slowly or rapidly?
If a company is not already a dominant player in an industry or market segment that is not growing rapidly, then odds are it will never be-unless it comes up with a radical, disruptive new product or technology.
Even then it has to gain market share, typically at great cost, before being out maneuvered by the entrenched market leaders who are not going to just give in.
Once a company understands what its core competency is, and what its market share is, it can then plot a course to maximize profits in the long term.
Strategic planning for small companies
Smaller SEMA- and AAIA-member companies have several strategic options open to them. Remember, to maximize profitability in the long term these will be smaller, specialized companies looked upon as experts in their market segment. They will also have a core competency in product development, customer relationships, or operations-although smaller companies will tend to excel in the first two categories.
One thing smaller specialized companies can have the greatest success with is maintaining their expertise in their own backyard. Instead of looking at other market segments to grow into, they can look at smaller, overlooked segments under their noses.
For a hypothetical manufacturer of truck parts, for example, before expanding into automotive parts for the sake of growth might look at even smaller specialized truck segments, like rock crawling or mud bogging. A strategic question to ask in this example is if there is more money to be made being a small fish in a big pond (starting to make automotive parts), or a big fish in a small pond (dominating many small segments).
Marketers call companies like this “super-nichers,” and these companies will wisely invest a lot of money to completely dominate small market segments that other companies wouldn’t dream of fighting over. To be successful at this strategy, core competencies like product development or customer relationships are critical.
Another strategy is to control growth, which can mean either controlling the rate of growth, or controlling the direction of growth. For example, small retailers that don’t control the direction of growth and expand geographically beyond their home turf risk becoming one of those companies stuck in the middle of a market, now forced to compete with coast-to-coast retailing giants and ultimately losing.
Strategic planning for large companies
Large SEMA- and Auto Care Association-member companies have several strategic options open to them as well. These companies, in order to maximize their long-term profitability, must already have a dominant market share position or in the case of a rapidly growing market segment must be able to invest to gain significant market share. Like the example for smaller companies, they will also must have a core competency either product development, customer relationships, or operations.
Larger companies can take advantage of economies of scale, and have a strategic advantage on price or product offerings. They might be able to compete with smaller companies on price and maintain adequate profitability. They may have an advantage over the competition by having a larger customer base or more efficient distribution.
Big companies with a core competency in product development can successfully compete by bringing out innovative products, but not necessarily being first to market. Many companies are successful following a “second but better” strategy, letting their competitor be first to market and learning from its mistakes. Two famous examples of this strategy from outside our industry are Diet Coke and Bud Light. Both the Coca-Cola Company and then-Anheuser-Busch resisted jumping in to their respective markets with reduced-calorie versions of their flagship brands for years. Only when they were ready did they jump in with their full resources and today Diet Coke and Bud Light have dominating market share positions.
Rule of Three marketing, the conclusion
The appropriate business strategy for a large or small SEMA- and AAIA-member company looking for long-term survival will become clear if a few critical steps are taken. First, focus on a core competency that a company does well, probably in the area of product development, customer relationships, or operations. Next, take a realistic evaluation of existing market share vs. the competition and the stability of the industry or market segment. Finally, decide on a strategy that makes sense for a company’s size, and realize there are very different strategies to help ensure success for large companies and small.
SEMA- and Auto Care Association-member companies can take a look at this simple checklist and with a well-executed strategy become a formidable competitor in their market segment or segments. Likewise, failing to follow this time-proven formula means running the risk of repeating the failures of companies that are no longer around.
It’s important to learn from the laws of market dynamics to better understand your strategic opportunities. Realistically examine if your market segment contains three market leaders. If it doesn’t, maybe the market is new or rapidly expanding, and you have an opportunity to become one of the top three market leaders. Or your market segment may be matured and you need to prepare for a shakeout. If that’s the case you need a plan to either acquire another company or companies, or be acquired. Create your strategy and plan ahead. But whatever you do, don’t get stuck in the middle.
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