Relative market share

From CEOpedia | Management online

Relative market share - refers to the market share of individual enterprises in relation to the largest competitor. It can be calculated using quantity of product sold (sales volume of a company or brand) or value of sales (turnover value which may be difficult to interpret because it changes with the change in the number of units and prices). Market share can be also calculated in global market or only in the market segment supported by the company. Share in the supported market will always be larger than the share in the total reference market. Value of relative market share is used in method of calculating the BCG matrix to identify position of product range on BCG matrix.

Relative market share is a process of mensuration market share. The business will gauge its market share with its rival to establish the comparative market share, with market conductivity being the most significant.

As they say Robert Jacobson and David A. Aaker most of all influential growth in strategic management has been the uprising of market share. Two causal explains are usually offered for the observed link betwixt market share and profitability. First is the linked effects of the experiment curve and economies of scope. Scope economies can be reached by greater share business as plant and equipment investment and outgoings such as marketing can be distributed over more units (Robert Jacobson and David A. Aaker. 1985, p. 11).

Why market share is profitable

There are at least three eventuality explains:

  • Economies of scale - The most brights rationale for the superior stake of return enjoyed by great share businesses is that they have reached economies of scale in delivery, production, marketing, and different cost components. A company with a greater share in a given the market will reach much more grade, more efficient methods of operation within a special type of technology.
  • Market power - Many of economists, particularly among those engaged in antitrust work, believe that economies of scale are of comparatively slight importance in most ingenuities. These economists dispute that if great-scale businesses earn advanced profits than their slighter competitors, it is a result of their superior market power: their dimension permits them to opportunity more effectively, "administer" prices, and, in the end, realize meaningly higher prices for a respective product.
  • Quality of management - The easiest of all elucidations for the market-share / profitability relationship is that both share show a communal underlying factor: the quality of management. Good managers are auspicious in attaining high shares of their particular markets; they are also competent in controlling costs, reaching maximum productivity of employees, and so on. Furthermore, once a business reaches a leadership position - possibly by expanding a novel field - it is much simplier for it to maintain its guide than for others to catch up (Robert D. Buzzell, Bradley T. Gale, and Ralph G.M. Sultan 1975, p. 2)

Examples of Relative market share

  • An example of relative market share is the competition between Coca-Cola and Pepsi. In the United States, Coca-Cola has about 42% of the total carbonated soft drink market, while Pepsi has about 31%. Therefore, relative to Coca-Cola, Pepsi has a relative market share of 31%.
  • Another example of relative market share is the competition between Apple and Samsung in the smartphone market. In the United States, Apple has about 43% of the total smartphone market, while Samsung has about 29%. Therefore, relative to Apple, Samsung has a relative market share of 29%.

Advantages of Relative market share

Relative market share is an important tool used to measure the success of a company in comparison to its competitors. There are several advantages to using relative market share as a metric:

  • It provides a measure of market competition and gives an indication of a company’s performance in comparison to its competitors.
  • It allows companies to identify their market position, which can help them develop a strategy to strengthen their market presence.
  • It can be used to identify potential areas of market growth or decline and identify opportunities for product innovation or improvement.
  • It can be used to measure the performance of a company's marketing campaigns and identify how well they are reaching their target audience.
  • It can help companies compare their performance to that of their competitors, enabling them to make informed decisions about their own business strategies and operations.

Limitations of Relative market share

Relative market share is a useful metric for understanding the competitive position of a company in its industry, but there are a number of limitations to consider when using it:

  • It does not provide a holistic view of the industry as it only provides data on a specific entity.
  • It does not take into account the size of the entire industry or any other external factors that may affect market share.
  • It does not provide insight into the customer base of the company or the overall customer base of the industry.
  • It does not account for the changing dynamics of the industry over time, such as new entrants and the rise of disruptive technologies.
  • It is not necessarily indicative of a company’s profitability, as it does not take into account the company’s costs or the cost structure of the industry.

Other approaches related to Relative market share

One approach to measure relative market share is to compare the market share of individual enterprises to the largest competitor. Other approaches that can be used to measure relative market share include:

  • Market concentration ratio which measures the market control of the major players in the industry.
  • Herfindahl-Hirschman Index which measures the total market concentration of the industry by summing up the squares of the market shares of all participants in the industry.
  • Porter’s Five Forces Model which measures the overall strength and attractiveness of a particular industry.

These methods provide an indication of the level of competition in the industry and can be used to measure the relative market share of individual enterprises. Summary: Relative market share of individual enterprises can be measured by comparing it to the largest competitor, as well as by using other approaches such as the market concentration ratio, Herfindahl-Hirschman index, and Porter’s five forces model.


Relative market share — recommended articles
Method of calculating the BCG matrix — Potential market — BCG growth-share matrix — Experience curve — Key success factors — Competitive rivalry — Competitor — Hofer matrix — Map of strategic groups

References

Author: Sylwia Wierciak

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