What’s it: Market leadership is the ability or action to influence or direct the market. The companies that can do this we call the market leaders, which have the highest market share, and often far ahead of the second-largest players. Companies can use their dominance to influence the market, whether for the price, quality standards, or best practices.
In an organization, leaders have an essential role to play in directing the company. Likewise, market leadership is crucial because it affects the direction and intensity of competition in the market. Market leaders are considered the dominant power and determine the price, strategy, and intensity of promotion. They also usually become benchmarks for competitors in developing strategies.
Characteristics of market leaders
The three characteristics of a market leader are:
First, it has the largest market share. You calculate market share by dividing the company size by the market size. You can measure the number of customers, sales volume, or sales value to calculate it. Long story short, market leaders have the largest number of customers or sales relative to competitors in the industry.
Market share is the most effective way to measure the success of a company compared to competitors. When a company has the largest market share, we assume it has a more effective strategy. If market share increases over time, it shows you the company’s product marketing is more successful than competitors.
Second, it should have a competitive advantage. Porter gives us insight into the sources of competitive advantage. He said it could come from cost leadership and differentiation.
Under cost leadership, the market leader is likely to have a lower cost structure than the industry average. Therefore, companies should make more profit than their competitors.
The largest market share indicates the company can sell products at high volumes. That allows it to achieve higher economies of scale and lower unit costs. The company may charge the price at the average industry level. Or, the company may lower it slightly below average to attract more demand.
Under the differentiation strategy, the market leader offers the best unique selling proposition, at least in the consumer’s eyes. Its products satisfy customers more than those of competitors. Therefore, consumers have strong reasons to prefer the company’s products over competitors’ products and are willing to pay a higher price.
The market leader source of excellence is also not only about products and prices but also from other marketing mixes, including:
- Extensive distribution channel. Market leaders can reach more consumers than competitors. The company may build it internally or in collaboration with a major distributor or retailer in the market.
- Intensive promotion. It was possible through heavy ad spending. The company also develops effective promotional channels to create a strong image in the eyes of customers.
Third, become a target for competitors. Some competitors may seek to attack the market leader and take over market leadership. It may be through aggressive price reductions to win over customers. Those who do this are called market challengers.
Meanwhile, several other companies prefer to imitate market leaders. We call them market followers. They don’t like to take risks like market challengers. They prefer to observe what the market leader is doing and then develop a strategy accordingly.
Market leadership strategy
The three general strategies for market leadership are:
- Develop the total market demand
- Expanding market share
- Protecting market share
First, develop the whole market. In this case, the market leader tries to increase the total demand in the market. That is possible by identifying new uses for the product.
The increase in market demand is beneficial for market leaders and for competitors as a whole. When the size of market demand increases, players enjoy higher sales potential.
Second, expanding market share. The keyword is to increase market share. Market leaders may use new product development, advertising, pricing strategies, distribution incentives, mergers and takeovers, and other strategies more aggressively than competitors.
The goal is to generate sales that are higher than the average competitor, either through:
- acquisition of more new customers
- increase repeat purchases
- divert customers from competitors
Third, protect market share. This is a defensive tactic in which the company tries to maintain its dominance. The keyword is the market share does not change.
That may be through the aggressive promotion, distribution, and development of new products. The company aims to maintain the rate of sales growth at a rate equivalent to market size growth.
Factor of consideration
Three essential factors are for a company to develop market leadership. They are:
- Operational excellence
- Product leadership
- Customer intimacy
For operational excellence, the market leader may achieve this by applying more advanced technology, process innovation, the right organizational structure, excellent logistics network, and reliable human resources.
Under product leadership, companies must produce new, innovative products to lure more consumers into buying. They must launch the right product to market sooner, so they are one step ahead of competitors in acquiring customers.
In customer intimacy, companies must be adaptive to consumer tastes and desires, for example, through customer relationship management. The company combines customer knowledge with operational flexibility to be able to respond quickly to customer needs.
Market leader advantages
Being a market leader offers several benefits:
First, profits are higher. The company generates a higher sales volume, enabling it to lower costs through higher economies of scale. Cost reduction can come from several sources such as through:
- Spread fixed costs (such as machine rental costs) to the more output
- Discounts from purchasing raw materials in bulk
- Specialization to increase productivity
Second, the company’s products have the most prominent position in the distribution channel. Distributors or retailers like market leader products because of their high demand. They are interested in placing market-leading products on significant shelves. They are also willing to promote market leader brands.
Third, the bargaining position against suppliers is stronger. Suppliers like to work with market leaders because they can sell their inputs at high volumes. To maintain cooperation, suppliers may offer discounts or more lenient credit terms. For market leaders, such offers are beneficial because they reduce costs.
Fourth, it is the primary material for promotion. Companies can use their claims as market leaders in advertising campaigns and other promotional materials. Such claims make consumers more confident about the company’s products. That, in turn, influences more consumers to buy it.
Fifth, attract more talents. It is easier for companies to recruit the best talents. People prefer to work for the biggest and most successful companies. Apart from being prestigious, companies may offer better career paths and job security.
Sixth, better access to finance. Market leaders are considered to have better financial capacity than competitors. Also, investors or creditors prefer companies with the highest market share because they think they make a lot of money.
Take, for example, a bank. They may select target borrowers from the market share of each company. Then, they checked his financial condition.
Because it has the highest market share, the bank assumes that the market leader should generate the highest income. They then check the company’s finances, whether the bottom line (net income) and operating cash flows reflect this or not.