Market wheel concept

market wheel

I was always interested in the history of the brands’ emergence, as well as their sudden disappearance from the market. Having studied the history of many companies, I noticed a certain pattern related to the emergence and growth, development, and change, as well as the extinction of once-successful businesses.

It is manifested globally by leading brands and locally by retail on city streets.

This pattern lies in the following:

  1. The new company appears like an inexpensive solution – a replacement for the monopolist leader, demonstrating low operating costs and an acceptable marketing alternative to what is in demand on the market.
  2. This company will inevitably increase its market share due to low prices and various bonuses.
  3. Its success attracts numerous competitors, who, in turn, imitate its marketing and business decisions.
  4. To distinguish the offer of its company from others and to keep the attention of already attracted customers, this company begins to diversify the offer, stuffing it with excess functionality, giving it off as the natural evolution of the original offer. This non-price competitive activity requires new production capacities and costs of pseudo-technologies, which increases the coefficient of operating expenses and reduces gross margin and, ultimately, profit as a return on investment.
  5. Having ceased to entice ever new consumers, but incurring high costs, the company begins global optimization: of goods, technological solutions, production costs.
  6. A new competitor appears with low prices (see point 1) against the background of the high costs of the leader, now formed by the “old” leader.

Thus, the market wheel rotates, crushing more and more successful market leaders in the past.

What is the market wheel?

I thought that over the decades of strategic marketing existence, it should have been observed many times and, the observed should have been framed in a concept. It turns out that back in 1958, Malcolm McNair described a similar concept for retail, as his theory of growth and development of retail institutions.

Like any movement, the “market wheel” moves under the influence of certain forces that make it spin. Let’s say, a change of leader occurs under the influence of three forces:

  • fear of losing what, in many ways, happened at random;
  • becoming a hostage to excess capacity;
  • under the influence of the ratchet mechanism of the wheel.

“Decrepit leadership” – the incompetence of youth

The reasons for the end of the market era of the old leader are what those things that led him to success, however paradoxical it may sound. A change of leader begins with where it all ends – with the devastating consequences of incompetence or (McNair) decrepit leadership. It is assumed that a new potential leader is a product of aggressive business views. The management of this company is economical, charged entrepreneurs who maximize profits and are little burdened with a base of fixed assets and fixed costs.

However, as a firm becomes a successful leader, it becomes vulnerable because their leaders weaken vigilance and cost control as they age and grow rich. It’s not necessary to believe that all the time, especially at the end of their company’s leadership, they think a lot and thoughtfully about the reasons for their success, read a lot – they are too busy: at first – solving a wide range of problems and accumulating capital, then – scaling and capitalization, later – retention and avoidance of a change in a leadership position.

Hostages of excess capacity

Leadership implies a significant market share – as a result of high demand, which means large volumes of manufactured and sold products, which require significant production capacity. Following the trend and seeing prospects, the leader is overgrown with excess production capacities, invests in the development or buys new technologies, costs for patents – all this forms his market advantage. Why does the leader buy excess?

Firstly, everything new and promising one is expensive. Secondly, remembering the beginning of their leadership and in the pursuit of “cost leadership,” one buys what makes it possible to provide leadership at low costs. Thirdly, having the financial ability and seeing yourself as a growing leader in the future, buying the new “for growth” – you buy the future.

So, imperceptibly and step by step, the market advantage dissolves. The gradual erosion of this advantage as a result of increasing competition from similar market players is part of the “wheel revolution” (McNair 1958).

Doubts about the fairness of the market wheel concept

It could be argued that not all companies – market leaders began their activities with the advent of low-cost, low-margin, price-oriented firms. Perhaps it is so. But send your gaze farther into the depths of the history of these firms, from the historical moment in which they are today’s leaders or have been recently. All these companies come from dad’s garages and from the experience of working as a simple clerk in a well-known company of those years when the foundations of their innovative leadership were laid, through the forced savings on everything that is possible. And it was formed out of a desire to make ends meet, selling at least something to someone at least for some money.

Recently, I was objected that the vending illustrates well the unfairness of the concept because it has always been an expensive form of distribution. Loughing, I answered the author of the objection that he obviously has little idea of ​​the total costs of the retail outlet (including rent, salaries of sales and office staff, utilities, etc.), with a location somewhere in the passageway of the downtown and how the costs relate for vending and these costs, in terms of the sale of one SKU unit. Reminded him that even having the opportunity and desire to buy a trading place in the city center, it is also difficult to do, due to the lack of space, as it is. Vending was born as an innovative alternative, which reduces trade costs and organizes trade where it is extra-budgetary or simply impossible to do.

As for the objection that many of the modern innovations, such as specialized stores – boutiques, health food stores, convenience food stores are not focused only on low prices, which means that their very presence contradicts the concept. I accept the objection, but I ask you to draw the attention of your opponents to the fact that boutiques and brand salons, showrooms where you can never find a low price are the invention of brands. By themselves, they contradict the very concept of retail trade where “all goods are on one shelf” and “all in one place” is convenient for the buyer who consumes these goods. It means that he also wants to buy them together, with a sufficient choice of them, and does not want to overpay for their purchase.

Boutiques and showrooms are another claw in the ratchet mechanism, which makes consumers believe that it is in these “special” stores that special goods are sold, they have a special relationship, for which the consumer is obliged to pay “especially” expensive.

How can a leader remain a leader or how not to spin a “market wheel”?

How can a leader destroy the ruthless “market wheel” and always (or for long) remain a leader?

  1. The company should have an atmosphere of leadership. It is created by the leaders of the companies themselves and those, who have leadership qualities. Now, if an ambitious youth has transformed into “decrepitude”, you should hire “agents of change” who consciously work to drag aging companies “tomorrow” through creative thinking and innovation and prevent them from overgrowing with excess muscle, which float without movement, and then they become stiff, preventing companies from moving. Individual leadership does not last forever, so companies should have an atmosphere that conveys leadership to others as a “virus”.
  2. The idea fix of the accumulation and collection of financial and production assets makes it difficult to realize that consumers have a source of profit for a market company. Today, the consumer, following the change in technology, is changing faster than the production line becomes obsolete or amortized. If you do not collect and do not invest in marketing assets, then you can not have time to recoup fixed assets.
  3. The marketing view of market competition is somewhat different from the business view of fierce competition. Marketing, in principle, is anti-conflict and competition, if we talk about the market, it only spins the “market wheel” faster, bringing the obvious – the change of leader.

Michael Porter argued that leadership has one of two strategies: cost leadership and differentiation. The methodological basis of Porter’s theory of competition is the concept of the consumer value chain that he proposed in 1985. He proceeded from the fact that the consumer value of a product is the price that the consumer is willing to pay for it. Well, yes, is ready! It’s not at all the one that can be cut down from the consumer by methods of propaganda and neuro programming, having overestimated it to the limit than by turning the “market wheel” even further – to a change of leader. Let me remind you that Porter studied the competition and has been a consultant to many leading companies, such as Procter&Gamble, Shell, T&T, DuPont. I tend to believe him. And you?

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