It is very common for companies to present themselves as "leaders". But in reality, the business strategy theory is clear: in any industry, once a territory is defined, there is only one leader: the company that invoices the most. There is no other definition of leader.
In this post I expand a bit on a previous post referring to a brand's growth strategy.
First, it is necessary to determine the size of the territory in which the leadership condition is to be measured. As the territory grows, it is more difficult for a company to maintain its leadership position. A brand can bill a lot in a city, but not necessarily be a leader in a country.
This is especially important when selling a very successful franchise ... in one territory.
It is important to understand the strategic chessboard, because from each position, companies have to do some things, but others, must be strictly avoided. For instance, the strategic plan of a number 2 (the second in revenues), is to permanently attack the leader, say, in communication and product development.
A little theory can help us analyze why words need to be measured before talking about leadership.
In any industry, once the extension of the territory to be considered has been defined, there are 6 competitors that invoice approximately 70% of the total invoicing. It is very important to establish what are the dimensions of the territory considered, because it may happen that by enlarging or decreasing the territory under consideration, the turnover of the competitors varies substantially and therefore their competitive positions would change. For example, Ford is a leader in Argentina and it is not in Europe.
Those 6 competitors are organized according to the following pattern:
As you can see, there is always a number 1, the leader, the one that bills the most, there are always two number 2, the challengers, and there are always 3 numbers 3, the followers. Then come “ninety-four” numbers 4, the guerrillas, always ready to attack.
Now, the leader can be a leader for two reasons, or because he has the best price or because he has the best differentiation that, consumers in the territory, value. At one extreme, that differentiation can become a competitive advantage, that is, a differentiation that cannot be copied. In this case, if that competitive advantage is valued by the consumer, the leader has long years of life. Companies are constantly looking for competitive advantages to become leaders. Only a small percentage find them.
Sources of competitive advantage
- Differentiation is being unique in some dimension highly valued by consumers. The prize for this is a premium price.
- The premium price must exceed the extra cost incurred by that differentiation
- The sources of competitive advantages are: product, channel, suppliers, scenario
In the previous scheme, the radius of each circle is proportional to the turnover of each company, the larger the circle, the greater the turnover. But a scheme like the one proposed occurs in very few sectors, and in reality, when one measures (or estimates) the turnover of competitors in a sector and in a territory, what you actually will find is a distorted map. This allows us to propose different "DNA" of industrial sectors.
A) Monopolistic DNA
- The sum of the two number 2 is less than the number 1
- The sum of the three number 3 is less than the sum of the two number 2
A sector that belongs to the monopolistic DNA has a clear and indisputable leader and the rest is developed in specific niches.
B) Oligopolistic DNA
- The sum of the two number 2 is greater than the number 1
- The sum of the three number 3 is less than the sum of the two number 2
A sector that belongs to the oligopolistic DNA, has three oversized companies that manage the sector, and there may be situations in which the leadership is held by any of the three companies at different periods.
C) Anarchic DNA
- The turnover of the main competitors is quite similar
On the other hand, the anarchic DNA sector does not have a leader very separated from the rest, and so the competition is fierce to dispute that position. Even when there is always a leader, it is likely that due to price or differentiation actions, the challengers will be able to reposition the sector, becoming leaders or seriously threatening their position.
What must each company do in its position, precisely to maintain it?
Number 1 must never attack, it must only defend itself. Number 2s must dedicate their lives to attacking number 1, and practice shows that they are often successful. The numbers 3 (for me the most intelligent position in the sector) must take care of their niche and make it grow without disturbing the three above, but always being on the alert with the ninety-fours below, who will ruthlessly harass them without truce.
The level of the number 3 is very interesting for the ones above, and very probably some of them (the leader or the two challengers) end up buying or merging them, which can be very attractive for the number 3s.
Also, the number 3s have an obvious differentiation, that is why they occupy that place, which allows them a premium price and a very good profitability. In practice, the leader and the two challengers have ROIs below number 3s. Even if they can achieve advantageous supplier conditions and other economies of scale, they are obliged to invest very large sums in marketing, research and development, human resources and new equipment, not so high priority in level 3.
The following premises emerge as a conclusion of the previous analysis
- Number 1 and both number 2 tend to "commoditize" the sector
- Number 3s and new entrants (number 4s) can only stay with one niche, usually geographic
- It can be considered a success for a number 3 or a number 4 to be part of a M&A deal delivered by a number 1 or a number 2
- There is a "logical path" for the evolution of a sector
- In the long term, all sectors are transformed into a two-competitor race
- Monopoly and oligopoly DNA should be considered as market “failures”
- Anarchic DNA shapes the true entrepreneur order
- Every business plan (or white paper) makes sense if it is designed to enter an anarchic DNA sector
When a territorial strategy is designed before granting a franchise, it is necessary to comply with this analysis to know under what conditions the new franchisee is going to enter the market. When a company enters a territory, the entire system is modified and reacts to the new player. If we do not do it with a strategic analysis, we may be generating a great headache, and then blaming the recession, the pandemia, the government or the Central Bank.
Let's not forget:
What is not measured cannot be managed
When granting a franchise, it is impossible to enter as number 1 or number 2. Surely we will enter as number 3 or number 4. Then the franchisee has the task of evolving in the territory according to the franchisor's general strategy.
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This article is a summary of one chapter of my book “Clinica Empresaria Reloaded” available on Amazon, only in Spanish