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Market analysis - importance of market share

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Why is Market Share important?

An important piece of research in the 1960's provided the basis for understanding the importance of market share - and emphasised the implications for marketing and business strategy.

The Profit Impact of Market Strategy ("PIMS") analysis was developed at General Electric in the 1960's and is now maintained by the Strategic Planning Institute.  The PIMS database provides evidence of the impact of various marketing strategies on business success.

The most important factor to emerge from the PIMS data is the link between profitability and relative market share.   PIMS found (and continues to find) a link between market share and the return a business makes on its investment.  The higher the market share - the higher the return on investment.  This is probably as a result of economies of scale.  Economies of scale due to increasing market share are particularly evident in purchasing and the utilisation of fixed assets.

Case Study on Market Share - Dixons (2000)

Dixons was widely regarded as the dominant electrical retailer in the UK .  What does dominant mean?  It refered to the fact that Dixons (which is the market leader) had a very high relative market share.  In other words, it was substantially bigger than the next largest competitor.  This can be illustrated by the chart below which showed the leading UK electrical retailers in 2000.

Market share example

How might Dixon's market dominance enable it to further increase its market share?  Many retail analysts believe that the electrical retailing market provides advantages to larger businesses.  The reasons for the advantages of size include:

Buying advantage: An ability to use size to source product more cheaply is a clear advantage in an industry that faces rapidly declining consumer prices

Volume advantage: As a low-margin business, retailers that can sell in high volumes are in the best position to gain market share

Access to new products: The largest retailers typically have first-mover advantage in stocking new "in demand" products that have just been released

Advertising scale:  As a price-led business, access to national advertising provides the ability to keep customers regularly informed of the latest product deals.  This helps to reinforce customer perception of value, in addition to strengthening the Dixons Group brands

Access to retail property: With the continuing trend towards out-of-town, larger destination stores that offer a broader range of choice, and with restrictive planning laws limiting opportunities, the larger electrical retailers have both the financial and operational capacity to secure such important new sites.

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