The combination of economies of scale (total annual volume) and the experiencecurve effect (total cumulative volume) can have a dramatic impact on the cost position of a firm by diminishing overall costs by some given percentage. This ability to reduce costs over time accords a quantifiable value to market share, which thus became a strategic variable in the BCG approach, on account of the inference that long-range profitability and cash generation are functions of market share because of the reduced costs. In a mature market, the dominant firm – the largest-volume competitor, will have the lowest costs, and hence, the highest profits. Market share and profitability are strongly related. On the average, businesses whose absolute market shares exceed 50% are more than three times as profitable as businesses with absolute shares of less than 10%. (Market share is the sales of the business as a percentage of the total dollar sales in the market served by the business.) Market share is both a measure of the business unit's performance and an important organizational capability. The market share of many business units in mature markets is more or less constant over time. If the gain or loss is due to short-term pricing activities or dealer promotions, then the average market share should be used, because these changes are easily countered and the business unit is vulnerable. However, if the change is a result of inherent change (such as creation of new distribution channels), the change in the market share should be studied. If the new contender is serious, you have to be serious too in defending your market share.
You must distinguish between market share and gain in market share. Here the focus is on current market share relative to competitors. Usually it is easier to gain market share in growth markets than in stable or declining markets. More opportunities exist from yet uncommitted new users. When total sales are growing, competitors tend to react less aggressively to erosion in market share. Conversely, in flat or declining markets, you must guard against your competitors. They will be as aggressive as you are in trying to protect their existing market share and in gaining new market share. Sometimes markets are composed of a few product lines. In some cases, an organization may also produce and market peripheral products and product lines. To measure market share using this framework, you should use only the organization's main product lines.
EXAMPLE: In the 1990s, Levi Strauss & Co. suffered erosion of its market share. In 1990, Levi’s held 30.9% of the U.S. blue-jeans market. By 1997, this share had dropped to a mere 18.7%. Although the process took place over a period of several years, it was only in 1997 that Levi’s managers understood the full extent of the problem. The fading market share was caused, mainly, by the failure to attract young customers. Trends such as wide-legged pants did not affect Levi’s, which remain faithful to its traditional models. The denim giant once a symbol of youth and rebellion was viewed by teenagers as an “uncool” brand. Once they faced up to the problem, Levi’s acted to gain its former position among the young population.
(Source: Business Week, 1997, "Levi’s is hiking up its pants," December 1, pp. 70-75.)
The experience-curve concept resulted in The Rule of Three and Four: a stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest. The experience-curve concept emphasizes cost discontinuities between different products and different markets, including geographic markets.
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My Zeide was a one person United Fund. Every year, about a week before the Day of Atonement, I went with him to the “settlement” to buy a paper plate. Petach Tikva had already been a town for more than fifty years, but the veterans still “went to the settlement”. Buying the single paper plate took about two hours. Since my grandfather was blind, I had to find the right size, unbent, clean plate. We visited several shops and compared prices. Recently, when I hurriedly bought a package of fifty plastic coated decorated paper plates I remembered the complicated transactions of my childhood. Then we bought a perforated paper doily to put on the paper plate, and it had to be the right size!
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