THE RELATIVE MARKET SHARE
 

 

 

 

 

 

 

 

 

 

 

 

With regard to the two axes of the matrix, relative market share is plotted on a logarithmic scale in order to be consistent with the experience curve effect, which implies that profit margin or rate of cash generation differences between two competitors tends to be proportionate to the ratio of their competitive posi- tions. A linear axis is used for growth, for which the most generally useful mea- sure is volume growth of the business concerned; in general, rates of cash use should be directly proportional to growth.

The lines dividing the matrix into four quadrants are arbitrary. Usually, high growth is taken to include all businesses growing in excess of 10 percent annually in volume. The line separating areas of high and low relative competitive position is set at 1.0. The importance of growth variables for strategy development is based on two factors. First, growth is a major influence in reducing cost because it is easier to gain experience or build market share in a growth market than in a low-growth situation. Second, growth provides opportunity for investment. The relative market share affects the rate at which a business will generate cash. The stronger the relative market share position of a product, the higher the margins it will have because of the scale effect.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classification of Using the two dimensions, one can classify busi- Businesses nesses and products into four categories. Businesses in each category exhibit dif- ferent financial characteristics and offer different strategic choices. Stars. High-growth market leaders are called stars. They generate large amounts of cash, but the cash they generate from earnings and depreciation is more than offset by the cash that must be put back in the form of capital expenditures and increased working capital. Such heavy reinvestment is necessary to fund the capac- ity increases and inventory and receivable investment that go along with market share gains. Thus, star products represent probably the best profit opportunity available to a company, and their competitive position must be maintained. If a star ’s share is allowed to slip because the star has been used to provide large amounts of cash in the short run or because of cutbacks in investment and rising prices (creating an umbrella for competitors), the star will ultimately become a dog.