What Is Relative Market Share?
Relative market share is a key metric in strategic management and business analysis that measures a company's sales or revenues in a specific market segment compared to those of its largest competitor. It provides a more nuanced view of a company's competitive standing than simply looking at its market share alone. Unlike absolute market share, which measures a company's sales as a percentage of the total market, relative market share indicates a company's strength or dominance within its immediate competitive landscape. This metric is particularly useful for assessing a competitive advantage and for guiding strategic planning and resource allocation decisions.
History and Origin
The concept of relative market share gained prominence with the development of the Boston Consulting Group (BCG) Growth-Share Matrix. Introduced in 1970 by Bruce Henderson, the founder of the Boston Consulting Group, this matrix uses relative market share on its x-axis and market growth rate on its y-axis to categorize a company's various business units or product portfolio into "Stars," "Cash Cows," "Question Marks," and "Dogs." The matrix was designed to help companies effectively manage their diverse range of products and determine where to invest or divest capital to optimize profitability. At its peak, the Growth-Share Matrix was utilized by approximately half of all Fortune 500 companies.5
Key Takeaways
- Relative market share gauges a company's competitive position by comparing its market share directly to that of its leading competitor.
- It is a core component of the BCG Growth-Share Matrix, a strategic tool for portfolio analysis.
- A relative market share greater than 1.0 indicates market leadership against the largest rival.
- The metric helps guide strategic decisions related to investment, growth, and divestment within a competitive landscape.
- While insightful, relative market share has limitations, as it simplifies market dynamics and does not account for overall market size or cash flow.
Formula and Calculation
The formula for relative market share is straightforward:
Where:
- Company's Market Share is the percentage of total sales or revenue generated by the company within a specific market segment.
- Largest Competitor's Market Share is the percentage of total sales or revenue generated by the company's biggest rival in that same market segment.
For example, if a company has a 30% market share and its largest competitor has a 20% market share, the calculation would be:
This indicates that the company is a market leader, selling 1.5 times as much as its closest competitor.
Interpreting the Relative Market Share
Interpreting relative market share provides insights into a company's competitive strength. A value greater than 1.0 (or 100%) indicates that the company is the market leader within that specific segment, possessing a larger share of the market than its biggest competitor. Conversely, a value less than 1.0 suggests that the company is a follower, holding a smaller share than its leading rival.
For instance, a relative market share of 0.5 means the company's market share is half that of its largest competitor, while a value of 2.0 signifies it has twice the share of its primary competitor. High relative market share often correlates with economies of scale and greater bargaining power, which can positively influence financial performance. This metric is often used in conjunction with market growth rate in market analysis to categorize products or business units for strategic decision-making.
Hypothetical Example
Consider two hypothetical companies, TechCo and InnovateCorp, competing in the smartwatch market.
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Step 1: Determine absolute market shares.
- Suppose the total smartwatch market revenue for the last quarter was $10 billion.
- TechCo's revenue from smartwatches was $3.5 billion.
- InnovateCorp's revenue from smartwatches was $2.0 billion.
- Other competitors collectively accounted for the remaining $4.5 billion.
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Step 2: Calculate individual market shares.
- TechCo's Market Share = ($3.5 billion / $10 billion) = 35%
- InnovateCorp's Market Share = ($2.0 billion / $10 billion) = 20%
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Step 3: Identify the largest competitor.
- In this scenario, InnovateCorp is TechCo's largest competitor based on market share.
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Step 4: Calculate TechCo's relative market share.
- TechCo's Relative Market Share = TechCo's Market Share / InnovateCorp's Market Share
- TechCo's Relative Market Share = 35% / 20% = 1.75
In this example, TechCo's relative market share of 1.75 indicates that it holds a significant lead over its closest competitor, InnovateCorp, in the smartwatch market. This strong position suggests TechCo might be a "Star" or "Cash Cow" within a BCG-style portfolio analysis, warranting continued investment strategy.
Practical Applications
Relative market share is a critical tool across various business and financial disciplines. In strategic management, it helps companies assess their position in the market relative to their toughest rivals, guiding decisions on where to allocate capital, whether to grow, maintain, or divest a product line. For instance, a high relative market share in a low-growth market might indicate a "cash cow" product that generates substantial cash flow for other ventures.
In marketing strategy, understanding relative market share helps in designing competitive campaigns and pricing strategies. A company with a dominant relative market share might focus on defending its position, while one with a lower share might target specific niches or pursue aggressive growth. The automotive industry, for example, frequently analyzes relative market share to understand shifts in consumer preference and the impact of new technologies, such as electric vehicles (EVs), on established automakers' market positions.4 This metric also informs product development and brand marketing efforts by highlighting areas of strength or weakness against direct competitors. Furthermore, financial analysts often use relative market share as an indicator of a company's long-term competitive viability and its potential for sustainable profitability.
Limitations and Criticisms
Despite its utility, relative market share has several limitations and criticisms. A primary concern is its inherent simplicity; it focuses solely on the largest competitor and ignores the overall market size or the combined strength of smaller competitors. For instance, a company might have a high relative market share in a very small or niche market, which may not translate to substantial overall revenue or profit.3 The metric also doesn't account for changes in market demand or the emergence of disruptive technologies that could quickly erode a dominant position.
Another criticism is that it can oversimplify complex market dynamics. It assumes that market share is the sole indicator of competitive advantage and financial performance, potentially overlooking other critical factors like customer loyalty, brand equity, operational efficiency, or patented technologies. Additionally, defining the "market" and identifying the "largest competitor" can be subjective, leading to different interpretations and calculations. Over-reliance on relative market share, particularly within frameworks like the BCG Matrix, can lead to generic strategies that fail to address the unique strengths and weaknesses of a business unit or the evolving nature of market power and concentration.2 For example, a product categorized as a "dog" due to low relative market share might still be highly profitable due to low overhead or strong niche demand. The International Monetary Fund (IMF) has also discussed how increased market power and concentration, often reflected in high relative market share for a few firms, can have broader implications for economic output, investment, and income inequality.1
Relative Market Share vs. Market Share
The terms "relative market share" and "market share" (also known as absolute market share) are related but distinctly different metrics used in business analysis.
Market Share (or absolute market share) represents a company's sales or revenue as a percentage of the total sales or revenue for the entire defined market. For example, if the total market for smartphones is 100 million units sold, and Company A sells 20 million units, its market share is 20%. This metric gives an idea of a company's overall size and presence within a given industry.
Relative Market Share, on the other hand, measures a company's market share relative to that of its largest competitor. It provides a direct comparison of a company's competitive standing against its primary rival. Using the smartphone example, if Company A has 20% market share and its largest competitor, Company B, has 40% market share, then Company A's relative market share would be 20% / 40% = 0.5. This indicates that Company A sells half as much as its leading competitor.
The key difference lies in the comparison point: market share compares to the total market, while relative market share compares to the largest competitor. Relative market share is particularly valuable for identifying market leaders and followers within a specific segment, offering a more direct insight into competitive strength and often informing strategic positioning within portfolio management.
FAQs
What does a high relative market share mean?
A high relative market share, typically a value greater than 1.0, means that a company holds a larger share of the market than its biggest competitor. This suggests a strong competitive position, potential for economies of scale, and often, market leadership.
Why is relative market share important for strategic planning?
Relative market share is crucial for strategic planning because it helps companies assess their competitive strength and allocate resources effectively. It is a core component of the BCG Growth-Share Matrix, which guides decisions on whether to invest more in a product, maintain its position, or divest it, based on its market dominance relative to competitors and the market's growth rate.
How is relative market share different from market share?
Market share measures a company's sales as a percentage of the entire market. Relative market share measures a company's market share specifically against its largest competitor's market share. The latter offers a direct comparison of competitive strength within a market segment, rather than overall market presence.
Can a company have a low absolute market share but a high relative market share?
Yes, a company can have a relatively low absolute market share (e.g., 5% of the total market) but a high relative market share if its largest competitor has an even smaller share (e.g., 2% of the total market). This scenario typically occurs in highly fragmented or niche markets where no single competitor holds a dominant overall share, but a particular company might lead within its specific niche.
What are the main drawbacks of using relative market share?
The main drawbacks of using relative market share include its focus solely on the largest competitor, potentially ignoring the overall market size or the collective strength of other rivals. It also simplifies complex market dynamics and doesn't account for profitability, operational efficiency, or other critical competitive factors beyond sales volume.