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.