By Brian Burwell & Jeremy Sicklick

  

What happened to the benefits of scale? Why are so many companies finding it so difficult to translate market share leadership into superior shareholder returns?

In the 1980s and 1990s, big was beautiful. At least that’s the view that seemed to define two decades in which market share leaders across most industries exploited a virtuous circle of size and shareholder value. Their success in building scale both resulted from and led to competitive advantages in serving customers and managing costs. The leaders used these advantages to increase sales, improve cost and asset efficiency and generate superior profitability – producing exceptional growth in shareholder value. This, in turn, gave them access to more and lower-cost capital to fund further investments in growth and scale.

More recently, however, the virtuous circle does not seem to be working so well. Many market share leaders like American Airlines, Coca-Cola, Diageo, General Motors and Pfizer are not delivering superior returns to shareholders. Rather, smaller rivals like Southwest Airlines, Cadbury Schweppes, Pernod Ricard, BMW and Roche are leading their industries in value growth.

What gives? Is small now beautiful? Large now bad? More pointedly, is market share leadership no longer a desirable goal if long-term value is the ultimate prize? In our experience, the rule of being "number one or number two in revenue" in one’s markets is not the right answer for every company. The right answer comes down to what kind of scale leads to competitive advantage. In this article, we put forward four success factors that enable companies to translate the right kind of scale leadership into performance – success factors that all companies can exploit to achieve top-tier value growth.

The Good Old Days of Size and Success
In his latest book, former General Electric Chairman and CEO Jack Welch repeats the mantra that was so central to how he linked market share leadership to stock market success at GE: "You have to have a clear-cut definition of ‘strong.’ At GE, ‘strong’ meant a business was No. 1 or No. 2 in its market. If it wasn’t, the managers had to fix it, sell it, or as a last resort, close it."¹ No company better exemplified the virtuous circle of revenue scale and shareholder value than Welch’s GE.

Previous Marakon research on scale and shareholder returns in the period when Welch led GE supported his belief.² Between 1986 and 2001, U.S. public companies that were number one or two in share of revenue or capital in their industries substantially outperformed competitors in total shareholder returns (TSRs). They delivered 12% TSRs (annualized) versus 4% for non leaders, and their revenue and earnings growth was 1-2% higher per year than nonleaders’. Furthermore, companies that overtook the market share leaders and became number one or two over those 15 years also outperformed their competitors: They generated average annual TSRs of 14% versus 4% for non-leaders, delivered annual revenue growth 8% above nonleaders and grew earnings 6% per year higher than non-leaders.

Footnotes 1 Jack Welch and Suzy Welch, Winning, HarperBusiness, 2005. 2 Lee Mergy and Heather Keeney, "Does Market Leadership Matter?", Marakon Associates, June 2003.