Jack Welch, the former chief executive of General Electric, is famed for his
dictum that every business within the company must be number one or two in its
market, or face being hived off. Over the years, he has off-loaded more than 100
businesses, collectively valued at $9bn (£4.6bn). But when the heads of those
divisions protested, pointing out that they were highly profitable, Welch
explained that “when number one sneezes, you get pneumonia. When you’re number
one, you control your destiny”.
But not all chief executives are so sharply focused. It is true that market
share is a sort of mantra in corporate boardrooms, and it goes a long way
towards explaining the bigger-is-better thinking that is responsible for many of
the deals contributing to the current surge in mergers and acquisitions
activity. Yet there is plenty of evidence to suggest that big is not necessarily
Many apparently logical and well-conceived mergers fail, or turn out to be
less successful than predicted. At the same time, venture capitalists enjoy
significant returns with businesses often given up for dead by large companies.
Something is clearly wrong with the market-share-is-all theory.
According to Stuart Jackson, vice president at LEK Consulting and author of
Where Value Hides, the problem comes down to “fuzzy thinking about
market share”. While insisting that GE under Welch did many things right, he
says there is one thing wrong with the ‘sneeze equals pneumonia’ idea. “It
assumes that someone in the organisation can define market share in a meaningful
(ie, profitable) way.”
Jackson believes it is important to add a little rigour to definitions of what
market share is. While many consultants urge their clients to get into new
businesses, Jackson demonstrates that how a company manages itself is far more
important than the sector it is in. “I’m not comparing companies in a hot sector
with companies in a cool one. I’m comparing apples to apples – mining companies
to mining companies, and computer companies to computer companies. Within each
industry, there’s an enormous range of performances over a five-year period,” he
Indeed, he cites research on the US’s top 1,000 listed companies, which shows
that the top-performing company is not just marginally better than the worst
performer in nearly every sector. It is more likely to be 200%, 300% or even
1,000% better. And often it is the household name that is at the bottom of the
For example, Campbell Soup could return only $887 of every $1,000 invested at
the same time as Oakland-based Dreyers Ice Cream delivered $4,842. Among food
retailers, Safeway US returned only $552 of $1,000 invested in the same period
that Austin-based Whole Foods Market yielded $4,143.
So, what makes the difference? Well, it’s not a lack of information. Today,
executives have data, statistics and analysis of all sorts coming at them from
all directions, all the time, and it is often too much for them to cope with.
Jackson believes the answer lies in companies’ choices about where and how to
grow. Working with such well-known companies as Baxter, General Mills and GE, he
has over several years developed and tested the principles that lie behind what
he calls strategic market position (see The SMP test below).
The approach involves a company’s executives asking themselves a series of
questions that will impose a discipline that will, in turn, help them understand
how their customers’ preferences, production costs and corporate functions
affect profitability. The idea is to produce a ‘value map’ for their company’s
industry sector, showing how and where increased scale and market share can
reduce costs, increase demand for products and services, and improve shareholder
But Jackson does not suggest the process is easy. Indeed, experience has
shown it is important to be methodical and rigorous, as well as prepared to take
ideas and insights from everywhere and then to plot out strategies to test
hypotheses. The rewards from such efforts can be great as the differences
between the top and the worst performers indicate.
Business history shows countless examples of companies that have got their
analysis wrong. Among them are DaimlerChrysler (see BMW versus Mercedes below)
and Hewlett-Packard, the US electronics company that, under former chief
executive Carly Fiorina, merged with ailing Compaq Computer in an effort to keep
pace with IBM, which had rejuvenated itself by developing a strong
services/consulting side, and Dell, the new arrival that was growing fast
through direct sales. The deal was opposed by Walter Hewlett, a board member and
son of co-founder William Hewlett, who argued that the acquisition was the wrong
solution to the company’s difficulties in dealing with a changing market.
Jackson says that Hewlett “intuitively thought about the business in SMP
terms”, when he suggested that instead of doing a deal that would increase its
exposure to PCs, while diverting resources and distracting attention from its
strengths in printers and servers, HP should have divested the PC business. If
Fiorina had thought about the business along the same lines and resisted the
pressure from advisers to do the deal, then “a great company could have avoided
a very costly diversion”, he says.
But Jackson is at pains to stress that not all acquisitions are misconceived.
One well-conceived move was United Parcel Service’s decision in 1991 to acquire
Mail Boxes Etc, a franchised operation of about 4,000 high street locations
dealing with the increasing demand among domestic users for a facility for
returning parcels from online retailers. Previously, non-business users of
parcels services such as UPS and Federal Express had to either visit often
out-of-the-way depots, or rely on the postal service to return packages. The
deal not only solved that problem for UPS customers, but also gave the company a
new distribution network that would increase the volume of packages at a time
when more people were beginning to work from home and use the internet for
“In retrospect, it’s clear that the acquisition redefined the customer
segments UPS served and, by extension, broadened and strengthened UPS’s SMP,”
writes Jackson. He says, “The art of business decision-making is the art of
simplifying a complicated world – simplifying it to a degree, but not so far
that it is meaningless. Smart leaders look at the key drivers.”
The SMP test
Four questions that executives considering an acquisition or setting up a new
business should ask themselves:
1. What strategic segment are we entering and who is the
2. Will the new business improve our strategic market position
(SMP) in segments where we already compete?
3. If we are entering a new strategic segment, can we leverage
our SMP in adjacent segments to ensure we achieve a strong SMP in the target
4. Bottom line. Will the new business make the weighted average
SMP for our overall company better or worse?
BMW versus Mercedes
A graphic illustration of the strategic market position principles at work is
illustrated by the contrasting fortunes in recent years of German luxury car
makers BMW and Mercedes.
BMW has always been small, but it has prospered by strengthening its position
in a narrow marketplace – the high-end of the performance car market. In recent
years, it has reinforced this by buying the rights to the Rolls-Royce name and
by retaining the Mini brand from its ill-fated acquisition of Rover Group.
Daimler-Benz was the world’s leading luxury car maker for many years. But,
when Jurgen Schrempp took over as chairman in 1995, he decided that being one of
only three independent producers of high-end cars made the company vulnerable.
Daimler-Benz would have to start making smaller and cheaper cars, and the
easiest way to do that was to acquire a company that already did that. This led
to the 1998 merger with the US company Chrysler. The idea was that this deal
would improve its position by producing synergies in the supply chain and in
production through sharing of parts, pooling of purchasing costs, merging R
&D budgets and the like.
In fact, since 1994 BMW has outperformed DaimlerChrysler “along every
measurable dimension”, says Jackson. BMW’s sales have doubled and its operating
profit margin has soared from 2.1% to more than 8%. Mercedes, on the other hand,
has tripled sales, but has seen operating margins slide from 6% at the time of
the 1998 deal to 3.2%. Between December 1998 and the end of 2005, BMW’s stock
price rose by more than 38%, while DaimlerChrysler’s was worth less than half
the peak it hit shortly after the merger.
Jackson says BMW is succeeding because it focuses only on the market share
that drives value and profitability rather than trying to have a car for
everybody. “What drives the difference in SMP is measuring market share in terms
of average share per model platform rather than aggregate market share for the
class,” writes Jackson.