An Inflection Point?
But the world has changed dramatically for many market share leaders since the end of the go-go ’90s. According to recent Marakon research (see "Research Methodology" on p. 5), market leaders worldwide in many industries have lagged their smaller peers in shareholder returns. In fact, across all industries, the median TSR of the number one and number two players (in terms of revenues) was less than a fifth the median TSR of non-market leaders worldwide over the last five years. In addition, the market share leaders’ advantage in both profitability (return on equity) and earnings growth reversed itself (see Figure 1). Why has this happened? Our research and client work points to several factors:
- Market economics in some industries (e.g., airlines, automobiles and steel) have deteriorated, and, in many cases, the biggest companies have been the hardest hit
- Many companies paid too much for acquisitions to increase their revenue scale
- Some companies behaved as if the benefits of scale were "just going to happen" and failed to take the steps necessary to extract those benefits
- Increases in revenue for some also increased the complexity of their businesses, which prevented them from converting their topline advantage into bottom-line and capital
market performance
Whatever the cause, it’s clear that the scale game is changing. In industries faced with poor and declining market economics, being the overall volume or sales leader has generally become a disadvantage. Across most industries, whether attractive or unattractive, the value of "being different" simply outweighs the value of "being big" for example, in pharmaceuticals (Roche versus Pfizer), electronics distribution (CDW versus Arrow) and property and casualty insurance (Progressive versus Allstate). At the same time, smaller companies across all industries are getting better at overcoming their scale disadvantages.
Does this mean that market leaders are no longer more likely to be winners in creating long-term value? If the conditions of the last four years continue to play out, the pursuit of market share leadership could become a snare for many companies – but not all. A new breed of scale leaders is emerging – companies that think about scale differently and are finding new ways to recreate the virtuous circle of size and success. Several market share leaders – Anheuser Busch in beer, Citigroup in financial services, Dell in computers, Exxon Mobil in oil and gas, and Procter & Gamble in consumer products – have been able to crack the code of translating revenue scale into success. They have led their industries in both market share and shareholder returns over the last five and 10 years, driven by superior profitability and above-average sales growth.
