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Strategic Considerations in the Blairgowrie Hairdresser Market – Part 2

If you know where you sit in the marketplace and can think strategically about it, you are better able to develop winning strategies. This sounds straightforward, but the competitive risks and challenges of different positions are often under-appreciated.

Part 1 of this article reviewed the relationship between market share and profitability. In Part 2, I explore more of the implications and potential strategies of different market share positions. I use the example of hairdressers in Blairgowrie to illustrate.

Market Types

Note that there are two different types of markets, and the following discussion relates primarily to the first.

Relatively Fixed Market

If the market has a relatively fixed size (such as the Blairgowrie Hairdresser Market), there’s only so much to go around, and any new entrant has to take a slice of the pie from existing players.

Here strategies need to be about competitors and your comparative offer, as the market itself is not growing.  Strategies such as a new product in an existing category, redesigning the business value chain, or consolidation/aquisition are typical.

Evolving Markets

In new or expanding markets experiencing high growth rates, market share positions are less relevant.  Increased levels of activity and promotion will create more business, further expanding the market.  Strategies here need to be focused on introducing new users rather than trying to win them from competitors.

Market Definition (& Size)

Your market share depends on how you define your market.

As a younger man I was trained in sales and marketing at Honeywell. Our regular sales reporting and forecasting relied on 3 market dimensions (TAM/FAM & SAM):

• Total Available Market – for the Blairgowrie hairdressers this means the entire hairdressing market of Scotland (or UK if so desired, which would raise a series of further implications).
• Forecast Available Market – which is the market in which we compete?  For our hairdressers in this example it would be the regional Blairgowrie market. It could be defined more narrowly – say salons in Blairgowrie.
• Share of Available Market – how much is our share of FAM for each hairdresser?

The Blairgowrie Hairdressing Marketplace

The following rudimentary consideration of the hairdressing market in Blairgowrie illustrates the important issues around market definition and how it can drive strategic thinking.

My wife’s need for a hairdresser and our research identified 7 hairdressers in Blairgowrie.

The Monopoly Scenario

Imagine that one of these 7 was much larger than the others, and accounted for more than 70% of all hairdressing revenues. This business is able to outspend smaller competitors on promotions, discounts and special offers, recruit the best staff and train them in the latest styles etc. Its premises are likely to look more attractive and enticing than others, and most of the women in town would not want be seen in any other establishment.

But it must continually work hard to maintain this position, as others are constantly challenging. Any complacency or slippage in standards will see it begin to lose clients, and once this starts it is more likely to accelerate than reverse.

There are other strategic weaknesses and risks involved here as well. There are diseconomies of scale, with the need to service small or uneconomic segments as well mainstream business, and a tendency towards complacency which combine to produce an often inefficient use of assets and lower return on capital.

A monopoly also carries life-threatening risks – being an attraction to big (often international) competitors and the danger of regulatory intervention to remove monopolistic status.

The primary strategy here is to protect the current business, with a focus on efficiency and profits whilst reducing the risk of new entrants.  Growth will only come for expansion into new markets, such as opening another outlet in a neighbouring town (Pitlochry?).

The Oligopoly Scenario

What if there were 3 main hairdressers, each with a relative share of more than 25%.  Each will have a fairly steady clientele and while comparative positions may change over time, it is more likely to be evolutionary as full-scale competition is difficult to justify. Competitor reactions will blunt the advantages sought and any additional business won is unlikely to cover the additional overhead of marketing and promotion, impact of price discounting and the like.

This is a good place to be. The business has economies of scale in purchasing, processing or marketing and has segmentation strength, where it can dominate chosen segments with product groups, customer type, geographic area or other. Players in this situation tend to be price leaders and this is really the only market share position where cost-based strategies can be implemented to boost profitability.

Strategies should be focussed on cost reduction, with dominance in selected segments improving price-based margins. Additional growth can be sought through merger/acquisition or geographic expansion. Our hairdressers should also be keeping an eye on industry trends and product/service improvements or business efficiencies to avoid unexpected competition or a shifting industry dynamic.

The Mid-Sized Scenario

What if there are 1 or 2 larger hairdressers who dominate the market and a number of smaller, niche style businesses, but you are stuck in the middle – too small to control the market, and too big to be a niche player – you are constantly challenged from both above and below. This is no-man’s land and has a limited future.

There are insufficient economies of scale in either buying or selling and the firm has to be a price taker and is beaten on cost or price by the dominant firms and on service or features by the niche specialists. In the middle ground enterprises have an inadequate identity and little consumer support. There is no long-term basis for success and firms in this situation are continually under threat.

Larger players will challenge you if you start to grow too big, as they protect their position. The journey from 10% to 20% is generally the hardest.

Smaller players will identify specific niches and service them with highly targeted offers, thereby eroding your own market base.

Suitable strategies here revolve around business definition – you either have to get bigger or focus on smaller niches. A stagnant approach will likely lead to a slow death.  To become larger, it is likely that considerable investment over time is needed – in promotion, salon upgrades, staff training and the like.  All of which is likely to be fiercely opposed. Consideration could also be given to consolidation.

Alternatively, the business can be redefined into a smaller niche/s which allows a position of dominance. This may include the development of multiple niches and geographic duplication/expansion of these niches.

Some of the more common methods of developing niches include geographic segmentation (adjoining towns, town outskirts etc), service specialisation (colouring/combination hair & nails etc), or repackaging of services (mobile service to outlying properties, annual membership with 15 cuts/colours paid on a monthly basis).

The Niche Player Scenario

Where you have less than 5% of the market you are either a niche player, a new and growing business or just not very relevant. If your offer is just the same as everyone else, and you have no distinctive clientele, then you are just small and have a limited future.

The strategy in this scenario is to identify a niche and redefine the services you provide to give customers better value more closely aligned to their needs and wants. For example, a long-established hairdresser with an ageing clientele doesn’t need to invest in expensive and fancy shop fit-outs to look young and trendy – in fact quite the opposite. Nor do they need to train in the latest styles, just keep up with what the older clientele expects. This allows prices to be kept down and client loyalty is assured. The business might slowly be dying along with its customers, but it can be a very profitable place to be.

Alternatively, you may offer in-home services only. With virtually no overhead other than product, you can expect better margins, albeit in a restricted market.

Niche businesses are another good place to be – many consider it to be the best. Specialisation means an enterprise can choose one segment and own it, meaning something to someone. Safety lies in the fact that the niche is usually too small for larger, dominant firms to fight over. The added service or features that win customer support allows enterprises in this position to be profitable, sometimes to the point of being sinful, as it is removed from mainstream competition.

On the other hand – market share of less than 5% without a niche specialization is not a good place to be – as it simply means that nobody cares. In this case it is only a matter of time before the going gets too tough.

Strategies therefore revolve around identifying and fully servicing a defined niche (becoming a dominant player in a more closely defined market). Larger businesses can arise by in turn replicating this in other territories.

Conclusion

This is not intended to be a strategic review of business possibilities in the Blairgowrie hairdressing market, but is a useful analysis to demonstrate how market definition and market share are important determinants of successful strategy. A badly thought out strategy which ignores these realities may fail if it doesn’t recognise the nature and extent of probable competitor response.

Any strategy needs to be defendable if it is to provide long term results – and that’s the whole point!

Strategic Considerations in the Blairgowrie Hairdresser Market – Part 2

It’s true – your ability to increase profitability is related to your market share. And market share depends on how you define your market.

While on holiday in Blairgowrie, Scotland recently, my wife needed to go the hairdresser.  This required extensive market research (there are 7 hairdressers in that town).  I had a couple of hours to kill whilst she got bobbed and blonded, and started thinking about markets and the importance of position and share.

The hairdressing market in Blairgowrie provides a simple illustration of how market share is determined by market definition and when coupled with strategic thinking, it drives potentially profitable strategies.

The Relationship Between Share and Profitability

Larger market share is highly correlated to better profitability – due to things like economies of scale, the experience curve, market power, the ability to set prices rather than follow the leader and so on.

It reflects your ability to meet the needs of consumers better than your competitors. Knowing how and why customers buy is important and in turn drives sales and income. Profitability on the other hand is determined by operational efficiency (and pricing) and is so more often a result of good management than size itself.

Industries tend to consolidate over time with a small number of firms enjoying dominant positions above a number of smaller firms.  This happens because better managed firms with a competitive advantage will grow faster than rival firms – and they can reinvest their profits to build share. Firms with superior skill and foresight can gain market share through lower prices or better products.

Success breeds success!

Medium size firms, on the other hand, are at a disadvantage. Generally, they don’t have any real competitive advantage, are forced to accept the market pricing set by the leaders, and without scale they tend to operate on slimmer margins.

They also have to fight off smaller, more focussed niche operators, who continually nibble away at their market.

Smaller players can be profitable. Most of them are just that – small and inconsequential, never really going anywhere. But the smarter ones redefine their market in terms of those customers whose needs they meet best. They focus their efforts on these profitable niches – be it product, demographic, geographic or some other distinction. And this can be a successful and profitable business.

Let’s first look at the relevant market share positions and what they imply:

• Monopoly – or near monopoly position (let’s say more than 70% market share).

This sounds good, but can actually carry many weaknesses and risks. There are likely to be diseconomies of scale, with the need to service small or uneconomic segments as well the mainstream business.

Over time, the organisation is likely to become complacent and overly bureaucratic, resulting in inefficient operations and use of assets and lower return on capital.

This type of business also carries life-threatening risks – being an attraction to big (often international) competitors and the danger of regulatory intervention to remove monopolistic status.

There are several examples of firms deliberately reducing a dominant market position to ensure longer term continuity of profitable enterprises or product lines (e.g. Proctor & Gamble).

• Dominant – an oligarchy of 3 or 4 leading competitors sharing the bulk of the market (over 25% each).

This is generally the safest and generally most lucrative position – as competitive strength comes from size and there is little incentive to adversely rock the boat by excessive marketing or price discounting which would lower margins.  It is also easier to defend against up-coming rivals.

Players in this situation tend to be price leaders and this is really the only market share position where cost-based strategies can be implemented.

• Middle – No-Man’s Land (25% to 5%).

This is the real danger spot as you are under constant threat from the bigger guys above and the nimbler specialists below.

Firms are beaten on cost or price by the dominant firms and beaten on service or features by the niche specialists. In the middle ground enterprises have an inadequate identity and little consumer support. There is no long-term basis for success and firms in this situation are continually under threat.

• Niche players (less than 5%).

Those that focus on a particular segment generally do well with an ability to charge premium prices.

Safety lies in the fact that the niche is usually too small for larger, dominant firms to fight over. The added service or features that win customer support allows enterprises in this position to be profitable, sometimes to the point of being sinful, as it is removed from mainstream competition.

In Part 2 of this article, I will review the Blairgowrie Hairdressing Market to highlight how strategic thinking about different market structures can influence strategy selection.