Sales growth in a developing market may seem easier to achieve compared to operating in a stagnant or declining market. A mistake in a shrinking market can destroy a business, while the same mistake in a growing market may only result in a temporary profit reduction. However, a growing market brings not only advantages but also risks, disadvantages, and threats.
CHARACTERISTICS OF A GROWING MARKET AND BUSINESS BEHAVIOR
Many assume that increasing sales automatically leads to a larger market share, but this is not always true. To grow market share, a company's sales must outpace the market's overall growth. For example, if a company's sales grow by 5% annually while the market expands by 12%, the company is effectively losing market share.
Relying on sales growth alone, without strong marketing insights, can be misleading. Performance is often judged by sales trends: increasing sales are seen as success, and the sales department receives praise, while declining sales spark blame, often directed at marketing teams. However, a drop in sales doesn't always mean poor performance. For instance, a 2% decline in sales within a market that shrinks by 6% could actually indicate strong relative performance.
MARKET EVOLUTION AND RISING COMPETITION
In its early stages, a market may be small, with modest growth and few competitors. Once the market starts growing rapidly (above 10% annually), it becomes more attractive, and new players begin to enter. The pace of this entry depends largely on barriers to entry; low barriers lead to a surge in competition.
As the market evolves, competition intensifies. A growing market often attracts more players than a mature one, but when the market reaches saturation, weaker and less experienced companies are often pushed out through consolidation.
Slower-growing markets are not always prioritized by existing companies. Frustrated by sluggish growth, some businesses seek to diversify into mature and highly competitive markets. However, this diversification can lead to underfunding of the core business and struggles to gain a foothold in new markets, increasing the risk of failure.
Economic crises play a significant role in shaping growing markets. While crises are challenging, they can have a "cleansing" effect, consolidating the market by eliminating non-competitive firms. Companies with strong financial resources and competitive advantages often gain market share during these periods. Crises can result in up to 40% of the market being vacated, sometimes representing as much as 70% of all sector players.
STRATEGY DEVELOPMENT IN A GROWING MARKET
The strategic goal of a business in a growing market is to rapidly increase its market share, sometimes at the expense of profitability. To succeed, a company must grow its sales faster than the market's overall rate. This approach helps to outpace weaker competitors and scale the business quickly.
However, rapid market growth is temporary. Companies need to focus on securing a large market share and establishing themselves as leaders before the market reaches saturation. Once a significant market share is achieved, the next step is to optimize internal processes. Scaling followed by streamlining provides a cost-effective competitive advantage.
A high market share drives large sales volumes, which, when paired with good profitability, generates substantial cash flow. Ambitious companies with adequate resources can adopt aggressive strategies to dominate mature markets, setting the industry standards and "rules of the game."
INVESTMENTS, EXPENSES, PROFITABILITY
Operating in a growing market requires significant upfront investments to capitalize on expansion opportunities. Key areas for investment include:
- Expanding production capacities,
- Building and promoting strong brands,
- Establishing a robust distribution network,
- Developing innovative products and services.
In the early stages, companies need substantial funding to fuel growth. Unlike mature markets, investments in growing markets are typically easier to recover due to rapid expansion rates.
However, a common pitfall for entrepreneurs is focusing too much on short-term profitability at the expense of essential investments in market share and competitive advantages. This short-term focus can leave companies vulnerable to competitors with aggressive strategies, who may outpace them in the future.
KEY FACTORS TO CONSIDER WHEN DEVELOPING A STRATEGY IN A GROWING MARKET
Crafting an effective strategy for a growing market involves analyzing both external and internal factors that influence success.
External Factors:
- Market growth rate: How quickly is the market expanding?
- Growth potential and saturation point: When will the market mature?
- Key success factors: What drives competitive advantages in this market?
- Market trends and influencing factors: Emerging patterns and external forces.
- Competitive environment: The number and strength of existing competitors.
- Opportunities for differentiation: How unique can your products or services be?
- Customer needs and pain points: Understanding what the market demands.
Internal Factors:
- Resource availability: Financial, material, and intangible assets.
- Talent and skills: The experience and competencies of your team.
- Production capabilities and technology: How scalable and efficient are your operations?
- Corporate culture: Your organization's adaptability and internal alignment.
- Innovation potential: The ability to create unique offerings or processes.
- Competitive advantages: What sets your company apart in the market?
STRATEGIC DIRECTIONS BASED ON MARKET POSITION AND RESOURCES
When developing a strategy for a growing market, companies must tailor their approach based on their current market position (e.g., size of market share) and the resources available for scaling. A clear framework helps identify the most effective paths for sustainable growth and competitive success.
MARKET LEADER: POSITION, STRATEGIES, CHALLENGES (Quadrants 1, 2, 3)
A market leader is the company with the largest market share, capable of influencing competitors and setting industry trends. Market leaders stand out not only for their size but also for:
- Strong brand reputation,
- High customer loyalty,
- Exceptional perceived value,
- Well-established distribution networks,
- Significant marketing investments,
- Consistent profitability.
Market leaders are often pioneers—either early entrants or innovators in their field. However, not all leaders boast strong financial performance. Some fall into Quadrant 3 due to:
- Financial donor role: Profits are redirected to support other divisions or projects within the group.
- Price competition: Dominance in lower price segments erodes margins due to fierce competition.
The strategic goal of a market leader in a growing market is to maintain dominance and grow market share. Profits must be reinvested into sustainable competitive advantages, such as innovation, customer experience, and cost efficiency, ensuring long-term market leadership.
In some industries like FMCG, where margins are slim, maintaining and increasing market share is critical to profitability and survival.
Strategies for Market Leaders
1. Aggressive StrategyLeaders pursuing an aggressive strategy focus on staying ahead of competitors by:
- Launching innovative products,
- Improving product quality,
- Delivering superior customer service,
- Differentiating products.
This strategy often includes bold branding efforts and promotional campaigns to:
- Expand into new market segments,
- Increase market share,
- Convert competitors into "followers."
2. Defensive StrategyThe goal of this strategy is to secure the leader's position by:
- Blocking new competitors from entering the market,
- Retaining key clients and partners,
- Strengthening positions in distribution networks.
Loyalty from strategic clients and partners is essential to prevent them from defecting to competitors.
PLAYERS WITH A STRONG MARKET POSITION (Quadrants 4, 5, 6)
Companies with a solid market position can pursue two distinct strategies:
1. Challenger StrategyChallengers aim to overtake the market leader by:
- Launching direct attacks (usualy targeting the leader's clients),
- Competing aggressively through price reductions, superior offerings, or negative PR campaigns,
- Acquiring weaker competitors to strengthen their position quickly.
2. Follower StrategyFollowers align with the leader’s market strategies, displaying two possible approaches:
- Non-aggressive: Passive growth driven by overall market expansion.
- Aggressive: Proactively targeting weaker competitors to boost market share.
PLAYERS WITH A WEAK (UNSTABLE) MARKET POSITION (Quadrants 7, 8, 9)
Latecomers to a growing market often lack the resources or competitive advantages needed to gain substantial market share. While their sales may increase with overall market growth, this is rarely enough to secure sustainable growth.
Future Scenarios for Weak Players
- Survival at the baseline: Modest growth fueled by market expansion, with slim profit margins. In competitive FMCG markets, this could lead to battles for survival as the market saturates.
- Niche positioning: Focusing on smaller, overlooked segments where differentiation or exclusivity can enable growth.
- Bankruptcy: A risk when markets saturate or during economic crises.
- Selling the business: An advisable option for companies in markets nearing saturation or with limited growth potential.
- Exceptions exist for businesses within holding groups, which may receive additional resources to strengthen their market position.
CONCLUSION
Crafting a strategy in a growing market requires more than chasing sales growth. Companies must outpace market growth to gain market share and solidify their competitive position. Without a solid strategy, apparent sales growth can be misleading, masking vulnerabilities and a lack of competitive advantages. In an expanding market, long-term investment strategies are essential to securing a strong position against competitors, rather than focusing solely on immediate profitability. Building competitive advantages and continuously adapting to market changes are key elements for success. In this context, accurately assessing performance requires a detailed analysis of market dynamics, not just sales figures.